Applied Business Finance: Importance of Financial Management and Processes for Financial Performance Improvement

This report discusses the concept and importance of financial management, financial statements, and the use of ratios in financial management. It also describes the processes businesses might use to improve their financial performance.

BSc (Hons) Business Management with
Foundation
BMP3005
Applied Business Finance
The concept and importance of financial
management and the processes
businesses might use to improve their
financial performance
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Contents
Introduction 3
Section 1: Definition and discussion of the concept and
importance of financial management 3
Section 2: Description and discussion of the main
financial statements and explain the use of ratios in
financial management 2
Section 3: Using the template provided 5
i. Completing the Information on the ‘Business Review
Template (Ensure that you display your calculations for this
detail)
5
ii. Using Excel producing an Income Statement for the Sample
Organisation (see Case Study). This should be included within
your appendices 6
iii. Using Excel completing the Balance Sheet 7
iv. Using the Case study information describing the profitability,
liquidity and efficiency of the company based on the results of
ratio analysis 8
Section 4: Using examples from the case study describing
and discussing the processes this business might use to
improve their financial performance 9
Conclusion 11
References
Appendix 12
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Introduction
Financial management is a very important concept for any organization to run their
business. It also ensures that functions of the organization are run in smooth manner without
any type of difficulty during the time of allocating funds (Aryani and Khaddafi, 2021). This
report defines the utilization of ratios in the financial management, concept of financial
statement and significance of financial government This report also discussed about various
ratios which includes efficiency, liquidity and profitability ratio with help of taking examples
from the case study. Examples includes balance sheet, income statement and others. In this
report review of business performance is also conducted for evaluating the financial
performance of the company. What strategies are required by the firm for developing and
improving their work efficiency in long term.
Section 1: Definition and discussion of the concept and
importance of financial management
Financial management is basically a process or concept which is used by the manager
in company for planning, controlling and directing the whole business activity. Use of all
these three elements by manager are highly essential for generating the revenue and profit of
company at large extent. In context of incorporates they also applies different principle ofr
authority to the financial resources of association, with additionally having major effect in
financial administration.
 Facilitating guarantee to the investors for achieving maximum from their venture.
 Effective and ideal utilization of assets from company side and employees.
 Made safe and genuine freedoms which puts resources into.
The various importance of financial management are -
 Funds allocation – The effective allocation of wide range of fiscal resources are
systematically divided as per the portfolio of organization (Azwitamisi and
Ngwakwe, 2021). Due to effective allocation fiscal ratio of the organization are
effectively improved in fast manner. It helps to reducing the cost and enhancing
monitory state of the organization.
 Profitability – If the resources and records of accounts are effectively managed then
definitely the productivity and goodwill of the firm are enhanced at maximum level.
It also ensures the analysis of overall development and work efficiency opportunities
of the organization.
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 Financial decisions – In this stage only higher authorities are involved for major and
financial decisions of company. It includes CEOs, director and managers of the
company and others. Due to taking various final decisions by the top level
management services are always delivered to customers in right time.
 Formation of capital structure – For effective utilization of money required, shape
must be formed systematically. Those companies which are highly depend on the
measures of capital, that organization must increase their amount with help of using
various outside sources.
Section 2: Description and discussion of the main financial
statements and explain the use of ratios in financial management
Financial management is defined as those records which are mandatory for each listed
organization to manage the manage the monitory functions of the firm (Dyukova,
Shainskaya and Syrovatsky, 2021). It facilitates the financial information or data and also
presents the current fiscal health of organization. This is highly essential for them to maintain
auditing process effectively and it is the major work of financial manger of various
organization. The auditing are done by the manager through external and internal sources. It
also provides guarantee that the financial statement which are printed by organization is
purely authentic. The statement are comes in different forms which are described below -
 Cash flow statement – In this phase fiscal report describes the net amount of outflow
and inflow of money from the business for specific time period (Fauziyah and
Sulastri, 2022). It also describes fluctuations in the money from financing, investment
activities according to specific time frame. In operational functions this statement
describes deviations made in the duty expenses, interests, current liabilities and
current resources. This statement also displays the outflow and inflow from the
problems of stakeholders money, payment of dividend and others.
 Statement of financial performance – It is defined as essential financial assertion
within company which facilitates broad understanding to the customer of monetary
data regarding company. Here statement shows overall liabilities and assets of firm is
committed to pay in future. It also perceived as monetary account or record which is
one of the primary concern for organization. In simple words this statement effects
where the corporate are standing monetarily for long time.
 Profit and loss statement – This statement shows the outstanding expenses,
expenditure, revenues and income which are occurred during financial period. It
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means it shows that dealing that are done in particular period and what are the cost
faced by corporate for increasing their market share and sales. With help of reducing
salaries of that period organization present their net profit for the period and it is the
finished component in income statement.
Uses of ratio of financial management -
Analysis of monetary ratio is basically a method or tool which is utilized by
organization for evaluating the financial information which are asserted over the whole fiscal
year. The main advantage for using this method by financial manager is that no barriers are
comes under the use of financial resources (Nisa and Haryono, 2022). It means employees are
able to utilize the all type of resources in unlimited manner which leads to increase the
productivity of company at maximum level.
 Comparative analysis – Comparison of different elements in the report of monetary
data is done with help of propositional evaluation of business. It presents the current
and previous performance of the company and prepare a base for compare the
working of different companies.
 Efficiency of operational activity - In aspect of ratio it helps the manager to decide
solvency and liquidity of company. It supports the administration with maintaining
less expense at high talent to meet mission, vision and objectives of organization.
 Support of financial ratio in supervisors decision-making – In this stage capacity
of acquisition, pattern of return, benefits and monetary report of the company are
utilized effectively. Due to effective consumption of these elements manager are able
to take always right decision regarding their business activities which leads to sustain
their productivity in long run.
Section 3: Using the template provided:
v. Completing the Information on the ‘Business Review Template
(Ensure that you display your calculations for this detail)
The Net Profit for the year 2016, is £43,057. (2015: £18,987,000).
The Company’s key financial and other performance indicators during the year
were as follows:
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2016
£’000
2015
£’000 Change %
Turnover (continuing operations) 189711 179587 +5.6%
Profit for the financial year 43057 18,987 +126.77%
Shareholder’s equity 83802.75 63,057 +32.9%
Current assets as % of current liabilities 222 % 304.00% -82%
Customer satisfaction 4.5 4.1 +10%
Average number of employees 649 618 +5%
vi. From continuous operations turnover increased by 5.6% during the year, primarily
due to the acquisition of the Extinguishers business on 1 May 2015, which made a
full year’s contribution in 2016.
vii. Gross Profit = £81,125
viii. Net Profit = £43057
ix. Net Profit increased in 2016 by 126.77% during the year.
x. Shareholders’ equity increased by 32.9% by £20,745.75.
xi. The company’s “quick ratio” (Current Assets (excluding stock) divided by
Current Liabilities) is 1.47:1
xii. The company’s “current ratio” (Current Assets divided by Current Liabilities.) is
2.22: 1.
(The calculation are shown in appendix)
xiii. Using Excel producing an Income Statement for the Sample
Organisation (see Case Study)
This is included within appendix
xiv. Using Excel completing the Balance Sheet
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xv.Using the Case study information describing the profitability,
liquidity and efficiency of the company based on the results of ratio
analysis
 Profitability ratio - These are the different types of financial parameters which are
utilized by company or financial manger for enhancing earning overtime in aspect of
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different elements of balance sheet and income statement of fiscal years. Due to using
financial parameters effectively present performance of organization are identified
easily. Some of the important profitability ratios are return on equity, return on asset,
net profit margin and gross profit margin.
Gross Profit Margin= (Revenue – cost of Sales) / Revenue * 100
= (189,711 – 108,586) / 189,711 * 100 = 42.76%
Net Profit Margin = (Net profit/ Revenue) *100
= (43,057/189,711) * 100 = 22.70%
Interpretation – From the above ratio it is understood that revenue are generated in sense of
percentage of profit which considers the non operating and operating expense (Octaviani and
Sasmita, 2021). Gross profit margin is the proportion of various funds which is deducted
from the net profit margin and revenue. Net gain is 22.7 and gross profit is 42.76% which
shows that profit is declining by 20% accurately. Therefore, organization needs to reducing
their overhead cost which interfering in earning and more net income. That why it is essential
for investor that they must compare their profits with other organization also.
 Efficiency ratio – In this ratio organization measure their overall liabilities and
assets. It also analyze that how much taken by organization for collecting their
payments from various customers and in which time they finish the debt repayment
for increasing their overall growth. The ratios which comes under this category are
account payable, receivable turnover, stock turnover and other ratios.
Asset turnover Ratio= Total Sales/ Total assets = 189,711/153,647 = 1.23
Stock Turnover Ratio = Cost of Sales/ Stock = (108,586/28,571) = 3.8
Accounts receivable Days = 365/ Debtors Turnover Ratio
=365/ 7.19 = 50.77 days
Accounts Payable Days = 365/ Creditors Turnover Ratio
= 365/7.04 = 51.84 days
Interpretation – The normal consumer takes appropriately the time of 51 days for paying
their debt whereas in case of creditors they take 52 days for receiving their payments. Due to
this reason organization receives and pays their payments in same time. But here limitation
are also there which creates problems for company during the time of receiving payments.
Inventory turnover of firm is 3.8 which means full investment of stock flow is around four
times in particular year that is three months in year. Therefore, the full asset turnover ratio is
1.23. It means organization is performing well and generating large revenue.
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 Liquidity ratio – It refers to determining firms ability for paying their debt obligation
and also talks regarding the company solvency. This ratio is totally based on the
stock, current liabilities and current assets.
Current Ratio = Current Assets/ Current Liabilities
= 84,349/ 37,928 = 2.22:1
Quick Ratio = (Current Assets- Stock)/ Current Liabilities
= (84,349 - 28571)/ 37,928 = 1.47:1
Interpretation – From the above ratio it is understood that the current ratio is 2:1 and fast
ratio is 1:1 (Riinawati, 2021). After the observation the current assets to the liability ratio is
2.22 that means organization is solvent. But, after excluding the stock from the current assets,
still the assets the quick ratio is 1.47 that means firm already have enough money for pay off
possessing and liabilities effectively.
Section 4: Using examples from the case study describing and
discussing the processes this business might use to improve their
financial performance.
Financial performance is basically refer to the life sustaining aspect of the business
activity (Santoso and Sari, 2021). Because in this process organization carrying various
actions which support the investor to take right decisions and also encourage them to made
lot of investment in the company. In financial resource wealth maximization is the primary
concerns for organization which leads to increase their profit margin in long term. From the
above calculations company performance are evaluated in various ways which are described
below -
 Increase in the net profit is by 126.77% because here non-operating cost such as
interest and expenses of administration are highly decreased.
 Current assets to the current liabilities has decreased by 82% from the previous
year, it means the outflow of cash is more and the liquidity of company are decreased
effectively.
 It shows that shareholder's equity is increasing, initiating in a increase in selling of
shares, rising of profits and decrements in the operating expenses.
 Level of customer satisfaction proves that the undertaking is investing more and
supporting the growth of the firm, due to which the employee retention ratio has also
increased.
Improvement that can be done by firm or manager are -
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 By increasing of the inventory turnover and reducing the inventory will show the
leverage in the requirements working capital.
 Efficient utilization of resources shows that lower the cost and increase the prices,
and will result in leveraging the profits which leads to increase the productivity of
firm.
 Effective use of marketing techniques or strategies helps to increase the
performance of firm with help of doing efficient utilization of the resources which
will help in generating more income.
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Conclusion
From the analysis of above information it is concluded that financial management is a very
important process and concept for increasing the company growth effectively. Due tom
effective growth profit and ratio of company are well balanced in long term. It tells all about
the assets, liabilities, shareholder's equity, profits, revenues, inflow and outflow of cash.
Financial ratios help in analyzing the solvency and the efficiency of the enterprise.
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References
Aryani, R. and Khaddafi, M., 2021. The Effect Of Financial Knowledge And Personal Net
Income On The Financial Behavior Of Malikussaleh University Employees With
Locus Of Control As Moderating Variables. International Journal of Economic,
Business, Accounting, Agriculture Management and Sharia Administration
(IJEBAS), 1(1), pp.1-13.
Azwitamisi, L. and Ngwakwe, C. C., 2021. Public financial management efficiency and
electricity service delivery in Limpopo municipalities. International Journal of
Public Sector Performance Management, 7(3), pp.301-313.
Dyukova, V., Shainskaya, E. and Syrovatsky, V., 2021. Analysis of financial technologies as
a tool for sustainable development. In E3S Web of Conferences (Vol. 295, p.
01040). EDP Sciences.
Fauziyah, A. and Sulastri, S., 2022. Financial education for MSMEs: What is the best
financial education delivery method?. Linguistics and Culture Review, 6, pp.391-
396.
Nisa, F. K. and Haryono, N. A., 2022. Pengaruh Financial Knowledge, Financial Attitude,
Financial Self Efficacy, Income, Locus of Control, dan Lifestyle terhadap Financial
Management Behavior Generasi Z di Kota Surabaya. Jurnal Ilmu Manajemen, 10(1),
pp.82-97.
Octaviani, I. and Sasmita, D., 2021. Household Financial Management Training for
Housewives Stairs during the COVID-19 Pandemic Period in Margasari
Village. ABDIMAS TALENTA: Jurnal Pengabdian Kepada Masyarakat, 6(1),
pp.81-85.
Riinawati, R., 2021. Education Financial Management during Covid-19 Pandemic of Islamic
Universities in South Kalimantan. Dinamika Ilmu: Jurnal Pendidikan, pp.383-396.
Santoso, A. and Sari, E. P., 2021. The Role of Financial Literacy as One of the Influences of
Financial Behavior. Jurnal Manajemen, 25(3), pp.415-430.
Sharma, S., 2021. Impact of work from home on financial wellbeing of it
employees. European journal of molecular & clinical Medicine, 7(10), p.2020.
Yulianto, A., 2021. Senior High School Student Financial Literation Categorization,
DoFamily and School Matters? An Evidence from Indonesia. Turkish Journal of
Computer and Mathematics Education (TURCOMAT), 12(6), pp.3593-3598.
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