Main reasons for monitoring companys financial performance

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We can say that there are two kinds of companies like: 1 private limited companies, 2, public limited companies.

For setting up these companies we need some procedures and documents like: 1, Memorandum form of association. 2, Article of association, 3, from INO1.

Companies can be registered via the website of a construction agent. But now-a-days companies' house could not offer online registration service. Instead of that companies are able to be incorporated with the companies' house utilizing manual form or in other words paper form instead.

1, INO1 form:

This form can contain some crucial information like name of the company which a business look for.

2,the address of registered office along with its location.

3,all those necessary details which are needed for the subscribers;

4, the permission for the company's secretary and even directors;

5, all the information and details about the share capital along with its all characteristics especially for the companies limited with shares;


All of those rules and regulation that we need for running or setting up a company include in the article of association. In addition article of association contain all the affairs of the inner management and legal responsibilities. If companies select to utilize the standard Model Articles they don't require to fill them with the companies house.

It is not possible to make changes in the Article of Association in violate of the other different companies' law rules. In addition there can be safeties versus those changes where those changes increase the liabilities of each shareholder's. Contrast the rights of the any of the shareholders or otherwise bigotry alternatives shareholders.


Memorandum of Association includes of the significant information about all the subscribers of the firm along with their autographs. In addition those firms that limited by shares need commitment that at least one subscriber might get at least one share.

Some additional clauses which memorandum of Association includes are or shown as:

1, Specified name is required for the running company or firm.

2, the office in which the firm is registered;

3, object clauses that means all the sector or phases in which the memorandum of Association which indicates the objects for that the firm is made or stand.

4, all the authorized share resources of the company;


1.2 Identify the different stakeholders of a company and justify their interest in the company's account.


Any party or group which has an interest in the project is called stakeholders or somebody who has the interest to hold the stakes for person or people betting against each other can be called stakeholder or stakeholders. Or if we define in details we can say that a person, team or corporation which has the straight or direct or indirect pledge or stake in a corporation because it can affect the organization's policies, objectives and actions. Stakeholders in an organization can be as the following: Directors, creditors, customers, government, employees, owners (shareholders), suppliers, unions and community from which the business draws its resources.

Mainly that there are two type of stakeholders like: internal stakeholders, External stakeholders.

Internal stakeholders like:

All those who have interest within the company internally like: customers, employees, suppliers etc,

External stakeholders:

The party that can be affected by the firm's work like: local government, local community, clients, bank in the case if the company has taken any loan, creditors.

Owners or shareholders: that category of stakeholders who risk their own money in business enterprise. Thus this party has interest in the dividend of the business which they expect that will be successful; shareholders will not only take care of the dividend but also expect the growth in the dividend.

EMPLOYEES: employees have a history of being the stakeholders because in 1970 they had very shaky claim of being stakeholders of the firm.

UNIONS: why unions are considered as the stakeholders? Unions are considered as the stakeholders of the business corporation because of their pay to defend jobs and boost salaries.

CUSTOMERS/CONSUMERS: if we say that how can the consumer be the stakeholders because the consumers are the party who buy the product and do not care about it. But when question come after the usage for repairing then the consumers also come under the stakeholders.

SUPPLIERS: there are two points that suppliers are concern about which to be paid punctually and win much of the business part. There for they really concern about these two points.

CREDITORS: creditors are the party who owe the money; creditors have enough right to be the stakeholders especially the secured creditors.

THE GOVERNMENT: after all few companies can be like the investment banks which possessed by the government along with significant shareholdings. The government is interested in two things however in the private limited companies which are:

1, Tax revenue;

2, duties and employment;


1.3 Explain main reasons for monitoring the financial performance of a business.

The question arises that why we need to look at the financial performance of the business. The answer can be vary the first cause in order to look at the quick review of the financial performance of the business with its all key financial imperatives of the business.

Through the financial performance of the business we can look at all those performances in order to make some significant decisions and take actions about the business. Monitoring financial performance of the is crucial for the given sales margins, profit margins and cash flow which are the basic and fundamental points considered by the business.

In addition monitoring financial performance of the business is crucial in order to know about the growth of the business substantially and precisely and lack of it can cause the business failure.

Financial statement:

Minimum financial information that we need should be periodic that means we have four period in one year. Financial statement at least includes the profit and lost statement and balance sheet. The positive point of the financial statement is that it shows the result of the business after all the business event.

Monitoring financial performance of the business is needed for the monthly or quarterly account.

STOCK TURNOVER DAYS: shows the period of time or numbers of days to sell the stock. It shows the lower ratio with quick stock sold.

DEBTORS TURNOVER DAYS: show the collection of the cash's time it is vital to keep days outstanding to a minimum.

CURRENT RATIO: shows the amount in which current assets can cover current liabilities and is the assessment of the capabilities to meet short term obligations.

DEBT/EQUITY: this is the assessment of the current amount to which the businesses trusts or depends on the external borrowing to support its on continuing process. In order to supply a trustful determination, assets ought to be valued at the market value.

INTEREST COVERAGE: it can offer an assessment of the abilities of the company to meet its interest requirements out of profits and is linked to the debt/equity ratio.

GROSS PROFIT MARGINS: it shows the success of the business and replicates the control over costs of sales and pricing strategy.

There are some other points that we monitor or in other words that business monitors financial performance of the business like return on investment, break even sales, profit and lost and cash flow budgets.


1.4: It is compulsory for every company to prepare its 'profit & Loss Account' and 'Balance sheet' at the end of the financial year. Explain the link between these two documents.

We can say that profit and loss account and balance sheet are both called financial statements. If the balance sheet and profit and loss account are called financial statement there would be obviously link between them.

The profit and loss account mainly indicates the profit and loss of the business over the specific period such as three months of period or a year etc.

Oppositely the balance sheet shows what the business has owed or owned so far. Before knowing about them completely we should define each of them.


Profit and loss account is also known as income statement or financial statement which shows the summary of the financial transaction for the business over the specified period of time.

Or in other words we can define the profit and loss account as: a financial statement that indicates the summary of costs, revenues and expenses sustained during specific period of time.

Profit and loss account (P&L) deals with the business affair which involves or always shows the profit so profit and loss account indicates the amount to which it has been successful to achieve this objective. Profit and loss account simply illustrates the following format: Revenues - costs= profit.


The extent which can be shown monetary (cash) or at the bank shown as current assets on the balance sheet is going to be resolute in a part by the income and expenses recorded in the profit and loss account.

Short-term loan taken by the business can come under the column of the balance sheet. But loan normally don't appear under the profit and loss account. The interest payments can come under the profit and loss account. The figures will have an influence on the net profitability figure or pattern.

As the profit and loss account shows the inflows and out flows of the business with the increment of the inflows the business profit goes higher and oppositely with the increment of outflows the business shows loss. In contrast balance sheet shows the summary of the assets of the business along with the liabilities and owner's equity.

The following figure can show the link between them.

1.5 Explain the concept of break-even point. Justify your answer with examples.

Break-even can be the technique which most often can be used by the management and management accountant. There are two points which are really considerable under the topic of the break-even point which are variable costs and fixed costs. Variable costs can be changed according to the production if production changes then variable costs also change. But in contrary the fixed costs remain the same whether the production changes or not.

The break-even point show and conceptualize where the profit and loss meet with each other.

In the break-even point sum of the variable and fixed costs are compared with the sales revenue to measure the volume of sales, value of sales at which the business make no profit as we mentioned before.


Fixed costs are those costs which are not directly linked to the level of outputs or productions. The level of the fixed costs will always remain the same even if the businesses have high output or zero output. But in long term it cannot be the same because it can be absolutely change from that of short term. For instance, if a business wants to add new unit in production or another department then it would be change.

Some e.g. of fixed costs:


Rents and rates,

Administration costs,

Development and research,

Marketing costs (but non-revenue interconnected)


Variable costs can always change directly according to the level of out puts that generates by the business. Variable costs illustrate payment output-linked input like direct labour, raw materials, fuel and revenue related costs such as commission.

There is contrast between direct variable costs and indirect variable costs which can be differed as following.

Direct variable costs:

Direct variable costs are those variable costs that could be straight attributable to the production of a particular product or service and assigned to a meticulous cost center.

Indirect variable costs:

Indirect variable costs are those costs that it cannot be attributable to the production but they do vary with outputs. Indirect variable costs include depreciation like usage of the property or any machine used maintenance and certain labour costs.

The third kind of cost could be named semi-variable costs which can be included in the break-even point.

Now the following one is the example of the break-even point.

1.6: Budgeting plays a vital in the success of business. Differentiate between budget and account?

First we should define what is budget? In simple words we can say that budget is collection of money used and assigned for a particular purpose. A budget is derived from old French word bougette later changed to budget in English. But budget is generally list of all planned expenses and revenues. Budget can be a plan for spending and planning.

A budget:

Budget is also one of the financial documents which the business can plan through budget along with its expenses and income in the business. Budget could be executed by individuals or the business firm in order to calculate approximately if the one or the firm could carry on to operate with its projected income and expenses.

The budget could be prepared differently like monthly budget which includes the following feature:

List which includes all the sources of monthly income;

2, list of all fixed costs which include utility, phone, rent etc;

3, list of all those variable costs which are possible required;

For setting up budget there are seven points to be considered as the following:

1, determine your income: whether the individual or business should know and determine that how much money they can pay in order to meet the expenses.

2, determine business fixed costs: these are the costs which cannot be changed month to month.

3, determine business variable expenditure.

4, compare the business's expenditure to the business's income.

5, track business's expenses;

6, adjust as needed.

7, evaluate business's budget.


An account can be the history, report, record or the statement of the transactions and the resulting balance. In other words we can define that an account is the record in the general ledger which is used for storing the debit and credit amounts. For example an account for the cash of the company which is recorded all the cash of the transaction involving the cash.

The difference between the account and budget can be simply express as the following:

A budget is how much money you have to pay out on definite items. For instance a family person can say I am not going to use up over $40 on groceries this month. If the head of household went over $40, then he/she went over their budget.

An account is how much money you have in a bank to pay bills.


1.7: Explain the 'Business Cycle' and documents that should be kept in order to prepare the final accounts of a company.

Rhythmic cycles of economic development and decline within commerce over a measurable period of time is called business cycle. There for firms habitually experience returning periods of profitability and poor cash flow often the consequence of annual variation in economic activity due to seasonal variations or holiday periods.

Documents which are required for the final account of the company are called the accounting cycle.


The accounting cycle which is also called the accounting process represents the series of activities which starts with transaction and finishes with balance sheet. Accounting cycle could be repeated in each reporting period.

1, transaction: the act of carrying out activities such as commercial or commerce within or between groups is called transaction. The simplest example of the transaction could be the paying our bills through our accounts.

2, journal: the second process step of the accounting cycle is the journal which is used for the recording of debit and credit side there for it is called double sided part of accounting cycle as one side is for the debit and another side is for credit. Journal could also be the example of our own ideas, thoughts and personal experience.

3, ledger: all those entries that accountants do in the journal then they record it in the ledger, but all the record should be appropriately recorded in the ledger. In other words ledger is also called final entry of the record. As it is said that ledger has two sided record there for the left side is called debit side and the right side is called credit side.

4, trail balance: the next part of the accounting cycle (process) is called trail balance. Trial balance mainly shows that whether the debit amount is equal to the credit amount. It is significant to balance and correct the discrepancies of the credit and debit side in the trail balance.

5, income statement: another name for the income statement is financial statement. Financial statement mainly shows the financial performance of the business over the specified accounting period.

6, balance sheet: balance sheet could be simply defined as it is made up of the assets= liabilities + capital/owner's equity.


1.8 There are different groups who analyse the financial performance of a company and bank is one of those groups. Why it is important for a bank to analyse the financial performance of a business.

As we have mentioned in the above questions like question number three that why different parties analyse financial performance of the business because we have said that it is significant to the parties (those who are interested) in order to make significant decision and plan for the future.

Bank is one of those parties who is interested in monitoring the financial performance of the business. That is why because bank wants to notice some points like:

1, liquidity: liquidity according to the bank is complicated to measure it because its position varies daily.

By the time bank's financial data are processed, the ratio might not show its current position. But the bank liquidity should be observed meticulously by operator otherwise it might cause the closing of the bank if financial problems become known.

2, asset quality: it is possible for the bank to fail because of bad bank loan. There for the ratio of the nonperforming of the assets to capital ought to be reviewed, specifically in relative to the bank's current and future earning prospective.

While estimating asset quality the party should compare the ratio of the charge off/asset to the ratio of the loss RSRV.

3, capital: while measuring the capital the party (bank) must focus on the ratio such as: equity-to-asset. The percentage of the ratio for the bank should be six percent for higher banks and might be eight percent for the lower banks. It is crucial for the bank's capital position to have strong growth in earnings with a low rate of the dividends payout ratio.

4, earnings: the most vital earnings' ratio according to the financial performance of the business could be those which show the bottom-line of the income statement. Manly the relative amount of the income to the asset s or pretax income on a tax equivalent basis to assets.

Bank earning process ought to commence mainly with the net income interest, which is already for the tax equivalency. There are some other points that bank analyse for the financial performance such as: cash flow, net income, assets, liability, financial statement, balance sheet and reports.