Applied Business Finance: Understanding Financial Statements and Ratios

Applied Business Finance

TABLE OF CONTENTS
INTRODUCTION-..........................................................................................................................3
SECTION 1......................................................................................................................................3
Concept and importance of financial management-....................................................................3
SECTION 2......................................................................................................................................4
Understanding the main financial statements and the application of ratios................................4
Section- 3....................................................................................................................................5
SECTION 4......................................................................................................................................9
The processes that the company might use to improve the financial performance-...................9
CONCLUSION-............................................................................................................................10
REFERENCES..............................................................................................................................11
APPENDIX-..................................................................................................................................12

INTRODUCTION-
Business finance refers to the funds required by the owners of the business to start its
operations, purchasing capital assets or to deal with sudden shortage of cash etc. Therefore, finance
is known as the lifeblood of any company. It includes acquiring the funds from various financial
institutions, creditors, raising equity, debts etc. Financial management is the most important activity
of the organisation. The report will deal with the concept and the importance of financial
management. It will also discuss the main financial statements and the use of ratios in financial
management. Ratio analysis is important for any company to know about its financial position. The
report will also cover the various business processes that the company will use to improve the
financial performance of the company.
SECTION 1
Concept and importance of financial management-
Financial management refers to the planning, organising, monitoring and controlling the
financial resources to achieve the desired objectives of the company. Financial management is the
application of principles of management to the company. If finance is not properly dealt with, the
company will face barriers that may hinder the growth and development of the company. It is
concerned with working capital management that is it focusses on working capital management. It
also lays emphasis on capital structure and capital budgeting of the company (Kennickell, Kwast,
and Pogach, 2017).
Importance of financial management-
 It is important for making various business strategies, formulating them, decision making
process and controlling.
 With proper financial management, all employees know about the progress of the company.
 To ensure the company has enough money in hand to meet its obligations.
 Minimisation of capital cost can help the company to gain more profits.
 Helps in optimum utilisation and proper allocation of funds (Why Is Financial Management
So Important in Business?, 2021).
 It increases the overall value of the company and provides economic stability.
 Helps in improving the profitability of the company.

SECTION 2
Understanding the main financial statements and the application of ratios.
Financial Statements is used to give the readers an overview of the profitability and financial
position of the company.
The financial statements consist of 3 basic statements. They are -
 Income Statement – It shows the revenues, expenses, and profits or losses of particular
period. They are the most important statements as they represent the operating results of the
company. It shows both operating and non-operating incomes and expenses. It also depicts
how much money flowed into and out of the company. Income statement can also be called
as statement of profit or loss, revenue statement, statement of financial performance, earning
statement and operating statement.
 Balance Sheet – It shows the assets, equity and liabilities of the organisation. It is prepared
for a specific point of time. It is structured such that the total of assets will always be equal
to total of liabilities. They are second most important financial statement as it provides the
information about the liquidity of the company. It is beneficial for knowing the liquidity,
efficiency and leverage of the company (Zorn and et.al., 2018).
 Cash Flow Statement – It shows the cash inflows and cash outflows of a particular
accounting period. This is useful for comparison with the income statement when the profit
or loss in the income statement does not reflect the cash flows of the business. Cash flow
statement is divided into three parts – operating, investing and financing activities (Titman
and Keown, 2018). Cash flow statement complements the income statement and balance
sheet of the company. The two methods of preparing cash flow statement are Direct and
Indirect method.
Use of ratios in financial management-
Ratio measure the relationship between two or more elements of financial statements. This is
used to compare the results of different periods. This can be evaluated through profitability,
liquidity, activity, leverage, and other relevant ratios (Brigham and Houston, 2021).