Applied Business Finance: Definition, Importance, Financial Statements, Ratios, and Improvement Processes

This article discusses the concept and importance of financial management, financial statements, and the use of ratios in financial management. It also explores the processes that businesses might use to improve their financial performance. The article includes a case study and covers the subject of Applied Business Finance for the course code BMP3005 in BSc (Hons) Business Management with Foundation.

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
Contents
Introduction p
Section 1: Definition and discussion of the concept and
importance of financial management p
0

Section 2: Description and discussion of the main
financial statements and explain the use of ratios in
financial management
p
Section 3: Using the template provided p-p
i. Completing the Information on the ‘Business Review Template
(Ensure that you display your calculations for this detail)
p
ii. Using Excel producing an Income Statement for the Sample
Organisation (see Case Study). This should be included within
your appendices p
iii. Using Excel completing the Balance Sheet p
iv. Using the Case study information describing the profitability,
liquidity and efficiency of the company based on the results of
ratio analysis p
Section 4: Using examples from the case study describing
and discussing the processes this business might use to
improve their financial performance p
Conclusion p
References
Appendix p
1

Introduction
Financial management is amongst the most critical departments for a successful
organization. Materials and cash are necessary for the organization's employees to run smoothly,
and these are controlled and allocated by money planners in order to achieve the corporate goals.
The theory and importance of financial administration are outlined in this study. Also included in
the policy level are income reports and the use of financial ratios (Lulaj, 2021). The earnings and
ratios were also estimated using the information from the company evaluation worksheet.
Furthermore, revenue, efficiency, and liquidity ratios are generated, and the company's progress is
examined. As a result, the approaches that can be applied to enhance the firm's productivity are
examined.
Section 1: Definition and discussion of the concept and
importance of financial management
Financial management is the process of obtaining finances needed to run a business
smoothly. Money planning encompasses all aspects of additional payments administration.
Any organization's heart is money. Finance performs an important role in every aspect of
company because it helps to generate money to finance expenditures including growth and
diversification of a company.
Financial Management's Importance-
Financial management encompasses a variety of comment thread that contributes to an
organization's overall profitability. As a result, the relevance of money planning can be
summarized as follows:
• Making decisions- One of the most important activities of a company is to take actions
about multiple events, such as whether to make or buy, whether to invest shorter or longer
period. Only with aid of financial management, each of these judgments may be made
quickly (Maini, Samson and LeJemtel, 2018).
• Budgeting: Each department has its own budgeted. Every discrepancy in money usage may
be discovered with the aid of monitoring.
• Liquidity: Operating money is needed to run everyday activities. Liquidity guarantees that a
company's activities are not hampered by a lack of cash. Finance management aids in
achieving this.
• Capital structure formation: A well-balanced combination of stocks and bonds leads in a
high company efficiency and low investment costs. A financial planning aid in the growth of
a company’s worth.
2

Section 2: Description and discussion of the main
financial statements and explain the use of ratios in
financial management
The financial statement is a set of claims that every publicly traded firm makes in order to
document the economic and financial facts of the business. It is critical for any business to
keep it in good working order. It provides a summary of the firm’s financial position and
current status. The following are the most important financial statements:
Balance sheet: The evaluation of financial situation is another name for this. It's broken
down into two sections: financial assets. This is often created at the conclusion of the
financial year to determine the business' profitability. Permanent, present, and non-current
assets, which comprise equipment, inventories, investments, and intangible assets, make up
the assets section of the balance sheet. The customers, often known as bills paid, are non-
current and current obligations (Kim and et. al., 2019). The liabilities category also includes
investor money, loans, and lengthy loans. It assists in determining whether or not the business
has the ability to take on new tasks. It also calculated the potential liabilities arising out of its
assets in the prospective.
Income statement: The income statement is an important aspect of every business. As a
result of this, various financial statements are prepared. It indicates the net profit made by the
company as a result of achieving its goals. This determines the different types of non and
operational revenue and expenses. The revenue is computed based on this data. Those are all
usually produced for a year, however an intermediate statement may be required by business
regulations. By subtracting all expenditures from the income, it reflects the profit margin. It
also aids in the calculation of profitability metrics (Lee, Lee and Kim, 2020).
Cash flow statement: The input and outflow of funds performed by the business are
evaluated in the financial statement. It may be assessed by categorizing all costs into
operational, finance, and investment categories. The money produced for the company's
normal routines is included in the operating activities. The flow of wealth in the economy of
shares and debentures, or dividends and interest collected or delivered by companies to their
investors in financial activity. The acquisition and selling of assets, as well as the deposit and
repayment of a debt for the purpose of generating money, are all examples of investment
activities.
Use of Financial Ratios
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Ratio analysis aids in the evaluation of a company's financial status, competitiveness,
and stability. In the accompanying directions, it aids in financial management:
1. Source of Information: It is critical for providing financials to stakeholders, since it aids
them in comprehending massive and complicated financial numbers. Shareholders find it
tough to evaluate figures at often, however ratios assist users in comprehending the current
state of an organization such that they continue involved in the firm's management
(Mangantar, 2018).
2. Solvency: A company's capacity to return its obligations on time are assessed by its
liquidity, acid test, current ratio, and other factors, like whether company is ready to pay its
obligations inside a fiscal quarter. An organization's payments process is regularly analyzed
with the use of statistics in addition to enhancing it such that their ability to repay improves.
3. Risk detection and prompt corrective action: A company works in a variety of business
segments and markets, many of which are risky. Risk and its many categories may be
evaluated using ratios, and remedial changes can be made to limit any hazard. The
profitability and the debt service coverage ratio show how reliant a company is on funding
sources and their capacity to return it on time.
Section 3: Description and discussion of the main
financial statements and explain the use of ratios in
financial management
Section 3: Using the template provided:
v. Completing the Information on the ‘Business Review Template
(Ensure that you display your calculations for this detail)
4

vi. Using Excel producing an Income Statement for the
SampleOrganisation (see Case Study)
This is included within appendix
vii. Using Excel completing the Balance Sheet
5

viii. Using the Case study information describing the profitability,
liquidity andefficiency of the company based on the results of
ratio analysis
Profitability Ratios: Such proportions are derived utilizing the company's various financial
returns. The profitability of the company, as well as its income and sales, are used to gauge
the connection. It is also used to evaluate a company's potential to make a profit in a
particular timeframe and to calculate how much revenue is gobbled away by the company's
various activities and non expenses. The computations and interpretations linked to their
profitability in commerce are shown below:
Interpretation: Following subtracting the operational and non-operating expenditures of the
firm, it can be observed from the aforementioned proportions how much profit is preserved in
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the company. The firm's gross margin is determined to be 42.76 percent, with a profitability
ratio of 22.7 percent. This means that even after operational expenditures are deducted from
sales, only 42 percent of the revenue is maintained in the company. After eliminating the
company's non-operating expenditures, 20% of the extra profit is attained. It is estimated that
the organization look at measures to lower its administrative expenditures and enhance its
profitability.
Efficiency ratio: This company ratio is determined to determine the productivity of the
business. The resources and liabilities of a company are evaluated within those ways of
determining how successful the business employees are. The below are the calculations and
meanings of various ratio analysis (Potrich, Vieira and Kirch, 2018).
Interpretation: Based on the estimates above, it may be concluded that the company is
inefficient. It is requiring about the same length of time to recover liabilities from its
borrowers as it is to provide these quantities to its borrowers. The asset turnover of the
company demonstrates that now the assets it owns are generating sufficient revenue. The total
asset turnover is 3.8, which implies that the initial stock financial effect roughly 4 times every
year, or 3 months per year. The return on total assets of 1.23 show that the organization is
working really well collecting adequate income at the conclusion of the budget year that stay
in business.
Liquidity ratio: This enterprise ratio demonstrates the company's liquidity situation and how
sustainable it is. The below are the proportions and their interpretations.
Interpretation: The optimal current-to-quick ratio is 2:1, whereas the quick-to-current ratio
is 1:1. It can be observed that the company's current ratio and quick ratio are higher than the
optimal ratios, indicating that the company is in strong stability. The current assets to
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liabilities ratio is 2.22, indicating that the business is sustainable. Nonetheless, despite
eliminating equities from current assets, the quick ratio remains at 1.47, indicating that the
company will have enough money to meet up its commitments and is doing so efficiently.
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 a vital part of a firm's success since shareholders determine
whether or not to participate in it based on how well it performs. As a result, it's critical to make
prudent fiscal judgments when approving money. However, because the firm's continuation and
survival are dependent on earnings, wealth maximization is the primary objective. Profitability
statements aid managers and financial institutions in making the best decisions possible (Egginton
and McCumber, 2019). It has been determined, based on the figures done, that:
• The current assets to total debt ratio has dropped by 82 percent year over year, indicating that the
receivable outflow has increased and it is losing stability.
• Since non-operating expenditures like administration expenditures and interest have decreased,
the net profit has increased by 126.77 percent.
• Service quality demonstrates that the company is spending even more sustaining its expansion,
that has resulted in higher in retaining employees.
• Assuming that shareholder equity is expanding, boost share sales, raise profits, and reduce
operational expenditures.
Improvements that can be done are as follows:
• Marketing practices that may be used to improve the firm include lowering expenses and making
effective use of resources, both of which will enable the firm generate more revenue. Advertising
on social networks, for example, is a better and less expensive way of attaining the greatest
number of people (Hamid and Loke, 2021).
• Efficient and appropriate resources utilization, resulting in lower costs and higher pricing, as
well as revenue compounding. It will also boost the company's production and efficiency.
• By lowering inventories and boosting asset turnover, the financing costs may be leveraged.
Conclusion
As per the above report it has been concluded that financial accounting is a critical
and highly important aspect of every multinational corporation, as the following study
summarizes. It will assist the management in correctly providing funding to sectors that are
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beneficial to the organization's progress and expansion. The financial management idea has
made it evident that the function of is mostly utilized in making major choices. It will assist
in projecting market demands and preparing about any problem that may arise in the
company. Furthermore, financial planning ratios are created, which will aid in evaluating the
profitability of the business and direct comparison may be made on this foundation.
Furthermore, techniques for boosting performance are presented.
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References
Books and Journal
Lulaj, E., 2021. Accounting, Reforms and Budget Responsibilities in the Financial
Statements. Accounting & Finance/OblikiFinansi, (91).
Maini, A., Samson, R. and LeJemtel, T., 2018. Instantaneous wave-free ratio as an alternative
to fractional flow reserve in assessment of moderate coronary stenoses: A meta-
analysis of diagnostic accuracy studies. Cardiovascular Revascularization
Medicine, 19(5), pp.613-620.
Kim, C. and et. al., 2019. Policy uncertainty and the dual role of corporate political
strategies. Financial Management. 48(2). pp.473-504.
Lee, J. M., Lee, J. and Kim, K. T., 2020. Consumer financial well-being: Knowledge is not
enough. Journal of Family and Economic Issues. 41(2). pp.218-228.
Mangantar, M., 2018. An Analysis of the Government Financial Performance Influence on
Community Welfare in North Sulawesi Province Indonesia. International Journal of
Economics and Financial Issues. 8(6). p.137.
Egginton, J. F. and McCumber, W. R., 2019. Executive network centrality and stock
liquidity. Financial Management. 48(3). pp.849-871.
Hamid, F. S. and Loke, Y. J., 2021. Financial literacy, money management skill and credit
card repayments. International Journal of Consumer Studies. 45(2). pp.235-247.
Potrich, A. C. G., Vieira, K. M. and Kirch, G., 2018. How well do women do when it comes
to financial literacy? Proposition of an indicator and analysis of gender differences.
Journal of Behavioral and Experimental Finance. 17. pp.28-41.
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Appendix:
Income Statement
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