Financial

Management
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CONTENTS
1.0 Introduction 3
2.0 Evaluation of Harry Inc Financial Position 4
2.1 Sales Growth Rate Calculation 4
2.2 Asset Growth 4
2.2.1 Current Asset Growth Rate 4
2.2.2 Fixed Assets Growth Rate 5
2.3 Current Ratio 5
2.4 Inventory Turnover 5
2.5 Days Payable Outstanding 6
2.6 Days Sales Outstanding 7
3.0 How shareholders can encourage managers to maximise shareholder wealth. 8
3.1 Performance-based compensation plans 8
3.2 Stock ownership 8
4.0 Important Obectives 9
4.0 Question 3 10
6.0 References 11

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1.0 INTRODUCTION
This report will focus on three main things. Overtrading. What is overtrading? What large
companies have overtreated in the past, and if Harry Inc is over trading, see appendices 7.1
for Harry Inc Balance Sheet and Income statement. Ways in which the shareholders of a
company can encourage managers to act in a manner that is consistent with maximising
shareholder wealth and discussing what objectives may be necessary to a PLC company and
whether the objectives are compatible with the primary objectives. This report will consider
two pharmaceutical companies, Astra Zeneca Inc and GlaxoSmithKline.

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2.0 EVALUATION OF HARRY INC FINANCIAL POSITION

Overtrading is when a business attempts to expand its business operations too quickly and
without sufficient resources. Overtrading can be caused by a high turnover and a low
current ratio. Overtrading can cause serious problems for a business and in some cases can
lead to business failure. This report will evaluate whether Harry Inc is overtrading by using
ratio analysis (Fernando, 2021).

2.1 SALES GROWTH RATE CALCULATION

The sales growth rate indicates the rate at the business is increasing revenue from sales
during a fixed about of time (Alfred, n.d.).
(£2900 – £1800)
£1800 = 61%

Harry Inc’s sales growth is extremely high which could lead to trouble further down the
road. Rapid growth often means borrowing more money to help chive this growth and but
when you borrow money it’s easy to run into debt issues especially when your growth slows
down to a steady level (Alfred, n.d.).

2.2 ASSET GROWTH

Assent growth shows how rapidly a business is growing in assets. Asset growth is calculated
as a percentage over a given period, it is measured on a TTM basis,

2.2.1 Current Asset Growth Rate

Current assets symbolize all the assets that the business owns. Examples of current
assets would be cash or cash equivalents, inventory accounts receivable and prepaid
expenses. Current asset is any asset that can be turned into cash within one year or a
normal operating cycle which is usually 12 months. (Hayes, 2021)

(£990 – £710) = £280

£990 = 28.28%

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The higher the current asset growth the better because it shows that a business in
generating sales or revenue from their assets, on the other hand a low current asset
growth could indicate that the business is not using their assets cost-effectively and
could be having internal problems (Hayes, 2021). Harry Incs current asset growth is
very low which means he could face problems in the future.

2.2.2 Fixed Assets Growth Rate

Fixed asset growth rate is used to analyse a business’s performance. Generally, a high
asset growth rate is a good thing but, in some cases, it can cause problems for a
business as it could mean they are over-trading and could not have enough funds to
covet liabilities when sales slowdown. (Fixed Asset Growth Meaning, 2021)

(£1000 – £820) = £180

£1000 = 18%

Harry Incs fixed asset growth rate is only 18%, this means that his fixed assets are
pretty stead which means it shouldn’t cause his business any problems in the future.

2.3 CURRENT RATIO

This is one of the liquidity ratios, it shows Harrys Inc’s ability to meet his short-term debts by
converting its current assets into cash, it also shows how much cash is in a business
(Fernando, 2021).

2017- 990/1990= 050.0:1

2016- 710/1530= 0.46:1

Current Ratio also helps to measure how strong the business is. If the ratio is high, it shows
the company is stable and if it is low, it could mean that the business is in distress, usually
anything below 1:1 is considered low and anything above is considered high. Harry Inc’s
current ratios are on the low side which could mean Harry Inc could have difficulties as they
might not have enough funds to meet their liabilities.

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2.4 INVENTORY TURNOVER

Inventory turnover is a way to measure how fast a business can change their inventory into
cash or profits. A decreasing inventory can be a sign that the busines is not converting their
inventory into profits as quickly as before and that can cause problems as they end up with
increased costs for storage insurance and maintenance (Contributor, 2021).
2016
1800-210 = £1690
£340
£1690 x 365 = 4.97
Days in inventory 74

2017
2900-260 = £2640
£430
2640 x 365 = 5.7

Days in inventory 64
It looks like Harry Inc has an increasing inventory ratio but decreasing days in inventory. The
decreasing days means that Harry Inc is lowering the number of days it sells stock, this is a
good thing but at the moment the day in inventory is still high.

2.5 DAYS PAYABLE OUTSTANDING

Days payable outstanding is a financial ratio that shows the average time that a business
takes to pay its creditors, this can be bills or invoices that are due from suppliers or vendors
(Hayes, 2021)

2016
£280
£1800 x 365 = 56.77 Days

2017
£510
£2900 x 365 = 64.18

A higher number in days is usually better for a business as it means they can keep their
capital for other short-term investments that can potentially raise their working capital, but
a low number of days (100 or more) could mean the business has trouble retaining cash and
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then the business will have trouble obtaining supplies. Debtor Days should be a balanced
number of days that allow a business to retain capital but preserves supplier relationships
by having timely payments (Controller, 2021). Harry Incs days payables are not too high
which indicates his suppliers don’t have to wait too long for payments.

2.6 DAYS SALES OUTSTANDING

Days sales outstanding measures the average amount of days that it takes a business to
collect payment for a sale (Kenton, 2021).

2016
£360
£1800 x 365 = 73 Days

2017
£570
£2900 x 365 = 71.74 Days

It is vital for a business to collect theirc to collect its outstanding account receivables as
quickly as possible as spent waiting to be paid is money lost (Kenton, 2021). Harry Inc has a
high number of days, which means it takes them a long time to receive payments which
means they lose money waiting.

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3.0 HOW SHAREHOLDERS CAN ENCOURAGE MANAGERS TO MAXIMISE

SHAREHOLDER WEALTH.

The primary financial objective for a company is usually the maximisation of shareholder
wealth. Sometimes managers may act in a way which does not lead to shareholder wealth
maximisation, the failure of managers to maximise shareholder wealth is referred to as the
agency problem. There are several ways to minimize agency problems, including:

3.1 PERFORMANCE-BASED COMPENSATION PLANS

Performance-based compensation is a rewarding system for employees outside their regular

salary. The manager could be offered financial compensation based on how well they
perform, usually there are set goals that the manager must meet to receive compensation
(What is performance-based compensation?, 2021)

3.2 STOCK OWNERSHIP

When managers join a company, they are offers company stocks for a cheaper price. Stock
ownership gives managers the feeling wealth. Giving the manager these cheaper stock the
shareholders hope that the managers will try their best to increase to companies stock price
because they can get bigger returns form their stocks.

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4.0 IMPORTANT OBJECTIVES FOR A PUBLIC LIMITED COMPANY

4.1 SOCIAL/ENVIRONMENTAL OBJECTIVES

Some business may decide to have social/environmental objectives to satisfy their
customers. They can also gain new customers which could potentially lead to
increased profits. (Pettinger, 2021)

4.2 LONG RUN PROFIT MAXIMISATION

Sometimes companies make expansion objectives. They sacrifice profits in order to
expand their company. This causes profit loss in the short run but could enable higher
profits in the long run. (Pettinger, 2021)

4.3 ASTRAZENECA & GLAXOSMITHKLINE

Sometimes companies make expansion objectives. They sacrifice profits in order to

expand their company. This causes profit loss in the short run but could enable
higher profits in the long run. (Pettinger, 2021)

“Major pharmaceutical player AstraZeneca has launched a $1 billion sustainability

plan in an ambitious bid to reduce its carbon emissions by 2030.” (AstraZeneca
launches $1bn sustainability plan, 2020). This is an objective set by AstraZeneca, it
will cost them a fortune, but they set this objective for themselves as they know it
will help the customers stay with them. Sustainability is important to a lot of
customers so even though this objective does not align with maximising profit it
might help them in the long run. Similarly, GlaxoSmithKline has set the same
objective. ‘GSK sets new environmental goals of net zero impact on climate and net
positive impact on nature by 2030” (SK sets new environmental goals, 2020)

“In 2020, we gave more than $76 million through our community investment
activities to more than 1,300 non-profit organisations in 88 countries. Every year
AstraZeneca spends millions of pounds helping charities and their communities and

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not just with money but also through product donations and volunteering.”
(Supporting our communities, 2021), This is more of an ethical goal, and it does not
align with maximising profits but it could win over customers as it shows they are
helping their community so people might be more willing to spend their money
knowing some might go back to the people in need. Similarly, GlaxoSmithKline has
helped millions of people and spent millions of pounds donating to charities “We
have donated over £7.2million to nearly 500 community healthcare charities
throughout the UK” (Charitable Programmes, 2020).

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6.0 REFERENCES

Alfred, L., n.d. How to Calculate Your Company's Sales Growth Rate. [online] Blog.hubspot.com. Available at:
<https://blog.hubspot.com/sales/sales-growth-rate> [Accessed 28 October 2021].

EPM Magazine. 2020. AstraZeneca launches $1bn sustainability plan. [online] Available at:
<https://www.epmmagazine.com/pharma-manufacturing-news/astrazeneca-launches-1bn-sustainability-
plan/> [Accessed 30 October 2021].

GSK Responsibility. 2020. Charitable Programmes. [online] Available at:

<https://www.gsk.com/en-gb/responsibility/charitable-programmes-and-partnerships/uk-charitable-
partnerships/> [Accessed 30 October 2021].

Contributor, C., 2021. What Does Decreasing Inventory Turnover Mean?. [online] Small Business - Chron.com.
Available at: <https://smallbusiness.chron.com/decreasing-inventory-turnover-mean-21667.html> [Accessed
28 October 2021].

Controller, C., 2021. What Are The Different Ways To Reduce Creditor And Debtor Days? | Complete Controller.
[online] Complete Controller | America's Bookkeeping Experts. Available at:
<https://www.completecontroller.com/what-are-the-different-ways-to-reduce-creditor-and-debtor-days/>
[Accessed 30 October 2021].

Fernando, J., 2021. What Is the Current Ratio?. [online] Investopedia. Available at:
<https://www.investopedia.com/terms/c/currentratio.asp> [Accessed 28 October 2021].

Stockopedia. 2021. Fixed Asset Growth Meaning. [online] Available at:

<https://www.stockopedia.com/ratios/asset-growth-5122/> [Accessed 28 October 2021].

Hayes, A., 2021. What Are Current Assets?. [online] Investopedia. Available at:
<https://www.investopedia.com/terms/c/currentassets.asp> [Accessed 28 October 2021].

Kenton, W., 2021. Understanding Days Sales Outstanding. [online] Investopedia. Available at:
<https://www.investopedia.com/terms/d/dso.asp> [Accessed 30 October 2021].

Pettinger, T., 2021. Business Objectives - Economics Help. [online] Economics Help. Available at:
<https://www.economicshelp.org/blog/2250/uncategorized/business-objectives/> [Accessed 30 October
2021].

GSK. 2020. SK sets new environmental goals. [online] Available at: <https://www.gsk.com/en-gb/media/press-
releases/gsk-sets-new-environmental-goals-of-net-zero-impact-on-climate-and-net-positive-impact-on-nature-
by-2030/> [Accessed 30 October 2021].

Astrazeneca.com. 2021. Supporting our communities. [online] Available at:

<https://www.astrazeneca.com/sustainability/supporting-our-communities.html> [Accessed 30 October
2021].

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Winston & Strawn. 2021. What is performance-based compensation?. [online] Available at:
<https://www.winston.com/en/legal-glossary/performance-based-compensation.html> [Accessed 30 October
2021].

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