Financial Management: Concepts, Statements, and Ratios

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Contents
Introduction..............................................................................................................................................3
Section 1..................................................................................................................................................3
Concept and importance of financial management.............................................................................3
Section 2..................................................................................................................................................4
Main financial statements....................................................................................................................4
Use of ratios in financial management................................................................................................5
Section 3..................................................................................................................................................6
Business Review Template..................................................................................................................6
Income Statement................................................................................................................................6
Balance Sheet.......................................................................................................................................6
Profitability, liquidity and efficiency analysis of the company on the basis of ratio analysis............6
Section 4..................................................................................................................................................7
Recommendations to improve financial performance.........................................................................7
Conclusion...............................................................................................................................................8
References................................................................................................................................................9
Appendix................................................................................................................................................10
Business Review Template................................................................................................................10
Income Statement..............................................................................................................................12
Balance Sheet.....................................................................................................................................13

Introduction
Financial management of a business is critical to its survival, success and growth as
finance provides funds for the operations and expansionary plans (Brigham and Ehrhardt,
2016). This report pertains to explore theoretical and practical illustration of financial
management in a company on the basis of an organisation provided as the case study
company. There are four sections in the report. First section pertains to explore and understand
the concept of financial management for an organisation. In the second section, an
introduction to main financial statements and use of ratios in financial management is
discussed. In the third section, practical illustration of the financial statements of the case
study company are discussed on the basis of ratio analysis so that observations can be drawn
on its profitability, liquidity and efficiency. In the final section, recommendations have been
suggested to the organisation for improvement on the basis of the observations drawn in
section three.
Section 1
Concept and importance of financial management
Financial management is the managerial function of planning, procuring, organising,
allocating, distributing and monitoring-controlling of the financial resources of an
organisation. It forms the base for fiscal management of the firm as well as is integral for
smooth operational management. Therefore, in other words, it can be said that it is planning
and ensuring effective financial health of the organisation or that it is that function of
management which involves financial planning and controlling. One of the primary objectives
of financial management of commercial organisations is to maximise shareholders’ wealth and
all of the efforts of the financial managers are directed in this direction. It aims to ensure that
business has sufficient supply of funds as is the demand within organisation. Other than
procurement of finance, it is also responsible for optimum, efficient and effective utilisation of
funds. It assesses the need of finance within different departments of the entity and provide
them funds so that their operations are neither halted nor disrupted (Shapiro and Hanouna,
2019). Furthermore, they look out, identify and explore real and safe opportunities for
businesses to invest in so that it can succeed and grow further. Below mentioned are some
roles played by financial management in an organisation so that importance of it can be
highlighted:

 Financial planning – It is entrusted with planning capital structure of the
organisation. It is also entrusted with helping senior management in framing
organisational policies and regulations. Both short-term and long-term financial
planning and accordingly procuring and utilising of financial resources comes under
financial management. This also helps organisation in making critical financial
decisions which enables enhancing profitability and overall value of the firm. All
these activities help organisation gain economic stability.
 Financial controlling – Other than planning, it is very important function of financial
management to monitor and control the activities done by entity so that it can be
ensured that company is achieving its objectives in a secured manner. Asset
utilisation, asset securing, profit minding, etc. all form part of financial control.
Activities of management are assessed so that proper execution of interest of key
stakeholders is ensured (Jung, 2018).
Section 2
Main financial statements
Transactions of financial nature are recorded and classified in the books of accounts.
These are then summarised in the form of written statements known as financial statements.
Users of financial statements are internal stakeholders such as management of the
organisation as well as external stakeholders like potential investors. Basic financial
statements prepared by an organisation are as following:
• Statement of income - It is also called as profit and loss account which is prepared by
accounts managers to comprehend the financial performance of the business over a
period of time. Therefore, it is known as a period statement. It is prepared as per
accounting principles like accrual accounting or matching concept. It accounts for all
the expenses incurred and revenue made during the definite accounting period. Final
outcome of this statement is net income which can be both net profit or net loss. It is
then further distributed as dividend to the shareholders or is retained by business to
use for future operations.
• Statement of financial position - It is also called as Balance Sheet. It is a point
statement as it reflects position of assets and liabilities of the company at a certain
point of time. Other than assets and liabilities, equity capital is the third component of
Balance Sheet and together they can be presented in expression, Assets = Liabilities +
Capital. Profit retained in income statement is transferred to equity shareholders’