Financial Statement As Determinant Of Profitability In Business Organisation

Project and Seminar Material for Business Administration and Management BAM

Financial Statement As Determinant Of Profitability In Business Organisation


Abstract


This study examined the relationship between firm financial management techniques and profitability. Six variables including Long-term-debt to Equity ratio (LTDER), Inventory turnover ratio (ITR), Debtors’ turnover ratio (DTR), Creditors’ velocity (CRSV), Total assets turnover ratio (TATR) and Net profit margin (NPM). Profitability as a dependent variable is represented by Net profit margin (NPM) while LTDER, ITR, DTR, CRSV and TATR were used. Descriptive statistics and multiple regressions were applied to data obtained from the annual financial statements of sampled business companies quoted on the Nigerian Stock Exchange. The results of the analysis showed that there is a positive relationship between LTDER, DTR, TATR and profitability while ITR and CRSV have negative relationships with profitability. Given the findings, the study recommends that the inventories of the company should be monitored more frequently to prevent stock-out or over stocking conditions of their products, that creditors’ velocity should be at a point where the creditors and purchases are equal in order to take the advantage of credit facility and any discount.


Chapter One


Introduction

1.1 Background of the Study

Finance is a field that deals with the allocation of assets and liabilities over time under conditions of certainty and uncertainty. In other way round of finance can also be defined as the science of money management.

A key point in finance is the time value of money, which states that purchasing power of one unit of currency can vary over time.

Financial Management as a determinants of profitability over the years that the determinant of profitability in business organization has been a problem faced by scholars. The use of financial statement as a determinant of profitability in companies is a very important aspect that cannot be overemphasized.

According to Emekekwue (2002), financial statement is an analyst of planning, organization and control of the resources available to an organization in other to meet the demands and materials resources.

Dave (2012) defines financial management as an integral part of overall management rather than as a staff speciality concerned with fund raising operations. He added that the central issue of financial policy is a rational matching of advantages of potential uses against the cost of alternative potential resources, so as to achieve the broad financial goals. Management of finance has evinced local interest both among the academicians and practicing managers primarily due to its immense potential to influence the profitability of an enterprise. This potential is engrossed in both the aspects of management of funds be it mobilization of funds or deployment of funds.

Pandeg (2002) argue that financial statement is that managerial activity which is concerned with the planning and controlling of the firm’s financial resources. The subject of financial statement is of immerse interest to both academicians and practicing manager. It is of great interest to academicians because the subject is still developing, and these are still certain areas where controversies exist for which no unanimous solutions have been researched at yet.

At micro economic level, performance is the direct result of managing various economic resources and of their efficient use within operational, investment and financing activities.

To optimize economics results, a special attention should be given to the proper grounding of managerial decisions. These should be based on complex information regarding the evolution of all types of activities with the company’s financial statements which therefore is found in the annual financial statements which therefore become the main informative source that allow the qualitative analysis of how resources are used during the process of creating value.

In order words, companies run on a long terms performance ways, it is needed to develop, implementation and maintaining the strategies, measures and coherent policies from economic and financial point of view, resulted from a good knowing of internal and external specific condition in which the firms acts.

The qualities of managerial options depends by the ability of identifying those elements that productivity used could lead to increasing of the results and performances.

The research objective of this paper is to investigate how to reach these goals, we believed that the most appropriate indicators that express the aspect related to economic development and performance growth of companies should be chosen among the relative indicators.

The empherical study of the correlations between different impact factors and profitability has been conducted by using the information taken from the annual financial reports of a company.


1.2 Statement of the Problem

Financial statement analysis can be a very useful tool for understanding a firm’s performance and conditions. However, there are certain problems and issues encountered in such analysis which call for care, circumspection and judgment.

Problems in financial statement Analysis include:

  1. Lack of an underlying theory.
  2. Conglomerate firms
  3. Window dressing
  4. Variations in Accounting Policies.
  5. Interpretation of Results.
  6. Correlation among ratios.

1.3 Purpose of the Study

The primary purpose of the study is to examine the financial statement as determinate of profitability in business organization in Abeokuta and give some reasonable recommendation on how to improve or enhance the standard of financial statements of an organization.

  1. To look into the financial statement of the companies
  2. Future performance of the companies.
  3. The benefits that people have gain in the companies so far.

1.4 Research Question

Based on the research questions, the following questions were developed.

  1. Is there significant relationship between total assets turnover ratio (TATR) and Gross Profit Margin (GPM)
  2. Is there significant relationship between debtors turnover ratio (DTR) and Gross Profit Margin (GPM).
  3. Is inventory turnover ratio (ITR) has significant relationship on Gross Profit Margins
  4. Is creditors velocity (CRSV) has significant relationship on Gross Profit Margin (GPM )

1.5 Significance of the Study

This study is expected to be significant in the following ways.

  1. It will serve as a reference materials to those who are interested and may want to carry out similar research.
  2. It will serve as a tool for the companies for decision-making.
  3. It will help the companies customers for compliance.

1.6 Scope of the Study

The research study will touch the financial statement as determinant of profitability of business Organization


1.7 Definition of Terms

Financial:

Is a field that deals with allocation of assets and liability overtime under condition of certainty and uncertainty

Business:

Is an organization involved in the trade of goods services or both to consumers.

Organisation:

Is a entity such as institution or an association that has a collective goal is linked to an external environment.

Profitability:

Is the state or condition of yielding a financial profit or gain. It is often measured by price to earnings ration

Economics:

Is the social sciences that seeks to describe the factors which determine the production, distribution and consumption of goods and services.

Determinants:

Is a value associated with a square matric.

Inteventory:

Referees to the goods and material that a business holds for the ultimate purpose of resale.

Deptors:

Is an entity that owes a debt to another entity.

Gross Profits:

Is also called sales profits is the difference between revenue and the cost of making a product or providing service.


Chapter Five


Summary Conclusion and Recommendation

5.1 Summary

This study examined the relationship between firm financial management techniques and profitability. Specifically, the study was aimed at looking into the financial statement of the companies, evaluate the future performance of the companies, and investigate the benefits that people have gain in the companies so far.Six variables including Long-term-debt to Equity ratio (LTDER), Inventory turnover ratio (ITR), Debtors’ turnover ratio (DTR), Creditors’ velocity (CRSV), Total assets turnover ratio (TATR) and Net profit margin (NPM). Profitability as a dependent variable is represented by Net profit margin (NPM) while LTDER, ITR, DTR, CRSV and TATR were used. Descriptive statistics and multiple regressions were applied to data obtained from the annual financial statements of sampled business companies quoted on the Nigerian Stock Exchange.


5.2 Conclusion

Long-term-debt to Equity ratio (LTDER), an indicator of the capital structure of the company shows a positive relationship with Net Profit Margin (NPM). The mean table shows that LTDER is -5.59% implying that the companies do not make use of Long-term-debt financing. Inventory turnover ratio (ITR) bears a negative relationship with the profitability of the enterprise. The debtors’ turnover ratio (DTR) bears a positive relationship with the profitability of the enterprise. The creditors’ velocity (CRSV) shows that management of creditors bears a negative relationship with Net Profit Margin (NPM) with significance level standing at 0.716 showing statistically insignificant. So the CRSV has no significant effect on NPM. Because of this finding on creditors’ velocity, the company is not taking advantage of any discount associated with prompt payment and this may lead to increase in their cost of sales and consequently decrease in their profit. Total Assets turnover ratio (TATR) indicates a positive relationship with Net Profit Margin (NPM). The (model summary) indicates that coefficient of multiple determinations (R2) is 91.3% of the variations in the dependent variable and are explained by the independent variables of our model. It also shows that the independent variables are the major determinants factor of net profit margin of the Nigerian Business industry while only 8.7% of the variations are determined by other factors. Given the findings, the study recommends that the inventories of the company should be monitored more frequently to prevent stock-out or over stocking conditions of their products, that creditors’ velocity should be at a point where the creditors and purchases are equal in order to take the advantage of credit facility and any discount associated with prompt payment for goods to increase the profitability of the company.


5.3 Recommendation

The study recommends that the inventories of the company should be monitored more frequently to prevent stock-out or over stocking conditions of their products, that creditors’ velocity should be at a point where the creditors and purchases are equal in order to take the advantage of credit facility and any discount associated with prompt payment for goods to increase the profitability of the company.


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