Concept and Importance of Financial Management

This document discusses the concept and importance of financial management and explores the processes that businesses can use to improve their financial performance. It covers topics such as definition of financial management, main financial statements, use of ratios in financial management, and case study examples. The document provides valuable insights for students studying BSc (Hons) Business Management with Foundation and BMP3005 Applied Business Finance.

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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Table of Contents
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....................................................................4
Section 3: Description and discussion of the main financial statements and explain
the use of ratios in financial management....................................................................5
Section 4: Using examples from the case study describing and discussing the
processes this business might use to improve their financial performance.................8
Conclusion....................................................................................................................9
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Introduction
Financial management is one of the most important function that has business
to perform well. it involves an acquisition of finance for the business at a minimum
possible cost, utilise the same and optimise in the way to run a operations for the
company smoothly. financial management is commonly done in every business is to
ensure that returns are received from the acquired finance should be greater than
the cost paid for the acquisition of the fund. it also aims to acquire the finance being
sure that any point of time there should be enough funds available for the
organisation so company can use in their operations to run smoothly.
There are certain importance of financial management that are
 It helps to ensure regular an adequate injection of funds in the business.
 It also has to exercise the stakeholders wealth by facilitating them higher
earning and returns from the investment.
 It also allow wrapping the maximum benefit from the funds so produced at the
least possible cost.
Section 1: Definition and discussion of the concept and importance
of financial management
Finance management can be defined as strategic planning, organizing,
directing and controlling financial aspect and activities within organization. Financial
management involves applying management principles to financial aspect of the
business and financial management is also important for fiscal management in
organization. Importance of financial management includes-
Enabling and guiding financial planning- This means that organization becomes
able to guide its financial planning through financial management (Ameliawati and
Setiyani, 2018). Financial planning is also important so that organization can make
right decisions regarding finance in organization.
Help in acquisition of funds from various sources- This is also a importance in
which effective financial management enables organization to get funds from
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different sources. This is because financial management reflect financial
performance and on the basis of this funds can be collected from different sources.
Enables effective investment planning- Financial management in organization
also enables organization to undertake effective investment planning. Investment
planning is concerned with planning about where finance is invested that yield high
return.
Reflect performance of business- Performance of business is reflected through
how well organization is able to make profit over its investment (Atmadja and
Saputra, 2018). Financial management outlines and reflect performance of business
organization through its profit and investment and also how well assets are being
utilized by business.
Enables business to control financial aspect of business- Financial
management also enables organization to control financial aspect of business. This
is possible through financial management which enables to identify expenditure and
income of business.
Section 2: Description and discussion of the main financial
statements and explain the use of ratios in financial management
Income statement- Income statement is an important financial statement and
income statement present revenues, expenses and profit and losses of the business
that are generated during a reporting period. This presents operating results of an
business during a reporting period.
Balance sheet- This is another main financial statement that presents assets,
liabilities and equity of the business organization (Prodanova and et.al., 2019). In this
information is presented about assets, liabilities and equity at a specific point of time.
Balance sheet considers that liabilities and equity of the organization should be
equal to its assets.
Statement of cash flows- Statement of cash flow presents cash inflows and cash
outflows within a business organization during a reporting period. This enables
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useful comparison with income statement because profit and loss outlined in that
does not reflect cash flows of the business.
Statement of retained earning- This is a statement that presents changes in equity
during the reporting period. Statement of retaining earning can also include sale or
repurchase of shares, payment of dividends and changes caused by reporting of
profit and loss.
Ratio or financial ratios are ways through which businesses can evaluate
performance of the company (Wadhwa, 2019). Ratios are used as with help of them
relationship between two or more components of financial statement can be
measured. There are different types of ratios that include leverage ratios that
measure total liabilities with shareholders’ equity and with total assets. Liquidity ratio
enables to understand liquidity of the business and profitability ratios enable to
understand profitability of the company.
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)
i) Completing Business review template
Particulars 2016
£’000
2015
£’000
Change
%
Turnover(continuing operations) 189,711 179,587 +5.6%
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Profit for the financial year 43057 18,987 + 126.77 %
Shareholder’s equity 83803 63,057 +32.9%
Current assets as% of current liabilities 0.5472 % 304% -82%
Customer satisfaction 4.5 4.1 +10%
Average number of employees 649 618 +5%
Profit for the financial year 2016
Turnover from the continuing operations or sale of goods in 2016 – cost of sales -
total overheads = 189711 – 108586 – 38068 = 43057.
% change in profit for the year from 2015 to 2016
= profit in the year 2016 – profit in the year 2015 / profit in base year i.e. 2015 * 100
= 43057 – 18987 / 18987 *100 = +126.77%.
Shareholder’s equity in the year 2016
= shareholder’s equity in the year 2015 / 100 * 132.9 = 83803.
Current assets as% of current liabilities in the year 2016
= Current assets as% of current liabilities in the year 2015 * (100 - 82) %
= 304% or 3.04 * 18% = 0.5472%.
Gross Profit =
sale of goods – cost of sales = 189711 – 108586 = £ 81125
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Net Profit =
Gross profit – total overheads = 81125 – 38068 = £ 43057
Net Profit increased in 2016 by 126.77 % during the year.
Shareholders’ equity increased by 32.9% by 83803 – 63057 = £20746.
The company’s “quickratio” (Current Assets (excluding stock) divided by
Current Liabilities) is 0.005472
The company’s “current ratio” (Current Assets divided by Current Liabilities. ) is
0.005472
Vii Using Excel completing the Balance Sheet
Balance sheet as at 31 December 2016
2016
Total
£0
Non Current assets
Intangible assets 5,793
Tangible assets 52,812
Investments 10,693
69,298
Current assets
Stocks 28,571
Trade debtors 26,367
Short term deposits 14,779
Cash at bank and in hand 14,632
84,349
Current liabilities
Bank loans and overdrafts 9,610
Trade creditors 19,493
Other Creditors 678
Income tax payable 3,585
Other creditors including tax and social
security 4,562
37,928
working capital 46,421
Total assets less current liabilities 115,719
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Non Current Liabilities
Bank loans and overdrafts 16,506
Other Liabilities 7,304
23,810
Provisions for liabilities 8,094
Net assets 83,815
Capital and reserves
Called up share capital 39,436
Reserves 1322
Retained earnings 43,057
Total equity 83,815
Viii Using the Case study information describing the profitability,
liquidity and efficiency of the company based on the results of ratio
analysis
Profitability analysis- The case study organisation’s profitability is good and
favourable because profit of the company has increased from year 2015 to 2016.
Increase In profitability by more than 126% outlines positive and favourable state of
profitability within organisation (Lee and et.al., 2017). Profitability of the organisation
is because of increased profit and this can be attributed to increase in sales.
Because of increase in sales revenue of the organisation has increased leading to
increase in profitability of the organisation. Increase in profitability can also be
attributed to reduction in cost or expenditure of the company and this can be found
through reduction in overhead and operating cost of the company.
Liquidity analysis- liquidity of the business is concerned with ability of the company
to use its current assets to meet its current liability. Liquidity also means how quickly
a business can convert its assets into case and in this current assets are considered
for conversion to cash. Concerned with liquidity of the company given in case study
its liquidity related performance is not good. This is because liquidity of the company
has significantly reduced from previous year (Lamtiar and et.al., 2021). This is a
negative indicator about liquidity of the company. This also suggests that liquidity of
the company is not satisfactory and this can create difficulties for case study
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organisation to fulfil its current liabilities through its current assets. Company also
find difficulty in converting assets to cash because of lack of current assets.
Efficiency analysis- data regarding case study organisation reflects that business is
performing efficiently because profit and net profit of the business has significantly
increased from previous year. Along with this efficiency of business can also be
measured through reduction in cost of the company and because of which profit also
increased (Menéndez and et.al., 2020). Along with this customer satisfaction of the
company have also increased and sales of the business have also increased. All
these elements collectively indicate efficiency of the company which has increased
because of which performance of business have also improved.
Using Excel completing the Balance Sheet
Section 4: Using examples from the case study describing and
discussing the processes this business might use to improve their
financial performance.
Process used within the business to improve their performance
 This business has very poor Liquidity position within the business which can
be improved more by reducing their expenses that are overhead, it can be
negotiated better with the credit are or the companies bitters to manage the
companies liquidity in the best possible manner (Rupeika-Apoga and
Solovjova., 2017). Cause if the companies character will give enough time for
making the payment then company will able to manage with their less working
capital and thus it will require less liquid assets for any kind of immediate
payments. Company can also allow the discount and offers to their doctors,
and company can avoid there liquidity that is stuck in timely manner, does it
may require a avail any form of support from outside for obtaining the funds
for company to run their day to day operations. Cutting off the unnecessary
head off can also provide helpful in saving enough liquidity and therefore it will
also lead company to retain their cash balance with business and according
today's quick ratio can be improved with a great extent.
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 By selling the assets that are not useful for the company can also be possible
way to get more capital for the company. this can be invested in the business
at free of cost rather than depending upon the factors or sources that are
externally borrowed from outside. through this liquidity it can also be on tend if
it is below the requirement level and also saving the liquid again possible
through liberation from interest charges which is required to be paid on
regular basis (Owen, Brennan, and Lyon., 2018).
 Attracting the more product sales by reducing the companies product prices if
there is and high level of competition within the market where companies
operating their business. it will help them to attract more customers to buy
their product and services and company can take competitive advantages and
gain knew customer and their loyalty. while on the other hand higher prices
should be charged by the business if it is facing rising costs of operations and
market price level allow for enough scope for rising the price of products sales
by the organization. In the boat situation can lead to more Prophet generation
and accordingly financial performance of the business can be improved and
Co can show their presence within the market where they are operating their
business.
 One more way to increase the performance of the company by investment
can be their own investment of money against debt capital will allow them to
make huge savings of the sufficient liquidity that is going to flow out of the
business on regular basis between similar interval of the time. the saving cost
by taking the interest charges can help company to reduce their risk and
terms of finance an enhancing liquidity of the company and company can
improve their capital and performance both.it can be negotiate better Tom
with the credit are or the companies bitters to manage the companies liquidity
in the best possible manner (Bellavitis., and et.al., 2017). Cause if the
companies character will give enough time for making the payment then
company will able to manage with their less working capital.
Conclusion
As for the business has been covered report on financial management and
explain the main financial statement that are necessary for the business. This report
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has been covered the business review off financial year 2016 including the quick
stress ratio and stakeholder Equity. in the end of this report has been provided
recommendation on business performance improvement and strategies that can be
helpful To increase the capital of the business so companies can invest in their
product and services.
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References
Ameliawati, M. and Setiyani, R., 2018. The influence of financial attitude, financial
socialization, and financial experience to financial management behavior
with financial literacy as the mediation variable. KnE Social Sciences.
pp.811-832.
Atmadja, A.T. and Saputra, K.A.K., 2018. Determinant factors influencing the
accountability of village financial management. Academy of Strategic
Management Journal. 17(1). pp.1-9.
Bellavitis, C., and et.al., 2017. Entrepreneurial finance: new frontiers of research and
practice: Editorial for the special issue Embracing entrepreneurial funding
innovations.
Lamtiar, S and et.al., 2021. Liquidity Effect, Profitability Leverage to Company Value:
A Case Study Indonesia. European Journal of Molecular & Clinical
Medicine. 7(11). pp.2800-2822.
Lee, B and et.al., 2017. Economic evaluation with sensitivity and profitability analysis
for hydrogen production from water electrolysis in Korea. International
Journal of Hydrogen Energy. 42(10). pp.6462-6471.
Menéndez, J and et.al., 2020. Efficiency analysis of underground pumped storage
hydropower plants. Journal of Energy Storage. 28. p.101234.
Owen, R., Brennan, G. and Lyon, F., 2018. Enabling investment for the transition to
a low carbon economy: government policy to finance early stage green
innovation. Current Opinion in Environmental Sustainability, 31, pp.137-145.
Prodanova, N.A and et.al., 2019. Methodology for assessing control in the formation
of financial statements of a consolidated business. International Journal of
Recent Technology and Engineering. 8(1). pp.2696-2702.
Rupeika-Apoga, R. and Solovjova, I., 2017. Access to finance for Latvian SMEs.
Wadhwa, B., 2019. Financial ratios: The precarious core of fundamental
analysis. Frontiers Journal of Accounting and Business Research. 1(1).
pp.33-35.
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