Concept and Importance of Financial Management

BUSINESS FINANCE

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
SECTION- 1....................................................................................................................................1
Concept and importance of financial management......................................................................1
Importance of financial management...............................................................................................1
SECTION- 2....................................................................................................................................2
Major financial statements...........................................................................................................2
Use of ratios in financial management.........................................................................................2
SECTION- 3....................................................................................................................................2
Ratio Analysis..............................................................................................................................2
SECTION- 4....................................................................................................................................2
Processes to be used in the improvement of the business performance......................................2
CONCLUSION................................................................................................................................2
REFERENCES................................................................................................................................3
APPENDICES.................................................................................................................................3

INTRODUCTION
Financial management is the process of managing a firm's financial resources such that
its operations could be smoothly and efficiently undertaken. It refers to planning, organizing,
managing and controlling its usage as finance is life blood of business. It begins with deciding
upon the capital structure, to arranging the finance from the cheapest available sources to its
efficient utilization in order to maximize the returns of the company. The current project shall be
providing conceptual understanding of financial management and its significance for the
business. It shall also be reflecting the major financial statements that are used to represent the
financial performance and position of the company. Further it shall be demonstrating the income
statement, balance sheet and the ratio analysis and on the basis of that the financial health and
well-being of the company shall be determined. Also, measures will be suggested in order to
improve the current position of the organization.
MAIN BODY
SECTION- 1
Concept and importance of financial management
Financial management refers to the process of managing the finances of the business
from the point of its acquisition to its successful utilization in the business. This shall be
governing the smooth and efficient functioning of the business through availability of funds
whenever they are required in the business (Madura, 2020). It involves making various financial
decisions in respect of the capital structure of the company, sources of finances, selection of the
investment proposal, dividend decision and the liquidity decision to manage the working capital
cycle of the business. Since the monetary funds are considered as the life blood of business so it
is necessary to maintain such funds so that unnecessary financial risk and losses could be
avoided. Such financial management is undertaken with the motive of maximizing the returns of
the company and to develop the future growth prospects through capital budgeting decisions.
Importance of financial management Optimum capital structure – Financial management assist in making certain financial
decisions in developing an efficient capital structure which strikes the balance between
the owned and borrowed funds of the company. The equity funds shall be diluting the
ownership and control of the business whereas the debt funds shall be imposing a fixed
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financial liability. So the financial manager of the company should decide upon a proper
capital structure which maximises efficiency for the business. Cost control – Another major importance of financial management is that it shall help in
controlling the costs of the company by using the alternative sources of finance whose
combination proves to be cheap and cost efficient for the business (What is the
importance of Financial Management? 2020). For example debt funds are less expensive
as compared to equity sources and the retained earnings is cheapest among all. Boosts operational efficiency – Some capital budgeting decisions are associated with
installing more efficient machines and technology which shall help in attaining
economies of scale thereby reducing the cost per unto for the company. Apart from that
also the working capital decisions ensures availability of finances in the day to day
operations which boosts the operational efficiency. Fulfils organizational objectives – The function of financial management that is
undertaken in an effective manner shall be significantly contributing in the achievement
of the organizational objectives like maximization of profitability, increasing
shareholders wealth and developing long term growth prospects of the business. Assist in investment decisions – The financial management process shall also be
supporting in making due diligent decisions in respect of investment decisions among the
various proposals that is available with the company (Shapiro and Hanouna, 2019). Post
the application of various tools and techniques the company shall be able to define the
investment opportunity that is generating highest returns for the company.
 Monitoring and control – Financial management plays key role in the monitoring and
control function of the organization by governing the systematic usage of funds. It
matches the target usage with that of the actual usage and finds the deviations that are
occurring in the business. Further corrective actions are taken so that such deviations can
be removed to boost the financial position of the business. ss
SECTION- 2
Major financial statements
Financial statements in the business are used to represent the true and fair view as to the
financial health and position of the company. These statements are used by the internal and
external users of the financial information for the decision making purpose of the business. Apart
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