Importance of Financial Management in Business

This document discusses the importance of financial management in business, including its objectives and activities. It explains the use of financial statements and ratios in financial management. The document also provides insights into processes that businesses can use to improve their financial performance.

Applied Business Finance
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Table of contents
INTRODUCTION......................................................................................................................3
MAIN BODY.............................................................................................................................3
Financial management...............................................................................................................3
Financial statements...................................................................................................................4
Use of ratios in financial management.......................................................................................5
Balance sheet as at 31 December 2016......................................................................................6
Processes the business might use to improve their financial performance................................7
CONCLUSION..........................................................................................................................8
REFERNCES.............................................................................................................................9
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INTRODUCTION
The report consist of the importance of the financial management fir the business, the
financial management is required in the start-up and in the running of the successful business.
The objectives of the financial management are discussed. The different activities done by the
financial management are discussed. The reasons are discussed that are making the financial
management important for the business. The main financial statement is discussed. The use
of the ratios in the financial management is also discussed.
MAIN BODY
Financial management
Financial management is important in the business for running a successful business. The
knowledge of the financial management is the one of the important aspect in business.
Financial management consist of activities like organizing, directing, strategic planning and
controlling the organisation’s financial undertakings. The organisation’s financial assets are
applied the management principles along with being an important part in the fiscal
management (Ameliawati and Setiyani, 2018). The objectives of the financial management
are:
 Maintaining sufficient supply of funds in the organisation.
 Ensures to that the shareholders get better returns for their investment in the
organisation.
 Efficient as well as sufficient fund utilisation.
 Creates safe and real opportunities for investment to invest.
The financial department of the business have to handle different function the
organisation such as:
 Calculation of the capital required (Gao and Han, 2021).
 Capital structure formation.
 Investing the capital.
 Profit allocation.
 Management of money effectively.
 Financial control.
Reasons for the importance of financial management are:
 It helps in the financial planning of the organisation.
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 It gives assessment in the acquisition along with the planning of organisation funds.
 The acquired and received funds of the organisation is effectively allocated and
utilised for the organisation (Hassanzadeh and Mashayekhi, 2019).
 Helps in taking critical financial decisions for the organisation.
 Increase the profitability of the organisation by helping.
 The overall value of the organisation is increased.
 Helps in providing the economic stability.
 Helps the employees in personal financial planning by encouraging them to save
money.
Financial statements
The reports that are provided with the details of financial information such as the
assets, equities, income, expenses, contribution, liabilities, shareholders and cash flow, are
the financial statements of the organisation. There are five main financial statements that are:
Income statement
For the specific period of time, three main financial information are reported by the
income statement of the financial statements (Osadchy and et.al, 2018).
The information consists of the profit or loss, expenses and the revenues for that time
being. The income statement is also known as the statement of financial performance. This is
because the statement helps the users to measure as well as assess the financial performance
of the entity. The users can do this time to time with the same entity, and the competitors.
The statement can be in two different formats based on the decision of entity. The two
formats are:
 The format in which the statement of the income and other comprehensive statement
are in the form of single statement.
 The format in which the income statement and the other comprehensive statement is
provided in two different statement and it is a multi-statement forma.
Balance sheet
The balance sheet is also known as the statement of financial position because the
value of the net worth of the entity is shown in the statement. The net worth is calculated by
subtracting the total assets and liabilities. At the end of the period the assets, equity and
liabilities are indicated in the statement.
Assets: The legally and economically owned resources of the entity are called assets. For
example, land, money, car and building. The assets are classified in two categories namely
Current assets and Noncurrent assets.
Liabilities: The obligation owned by the entity on the other person is called liabilities. For
example, bank loans, credit purchase overdraft, credit purchase and taxes payable. Current
and noncurrent liabilities are the two different categories of liabilities.
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Equity: the difference between the assets and liabilities are equities. Capitals, common stock,
reserves, retains earning and prefer stock are some of the items of equity.
Statement of change in equity
The statement that shows the movement and contribution of the shareholder in equity
is called statement of change in equity. The total share, retain earning, share capital and
dividend payment are included in the information of these statements. The income statement
and the balance sheet results in the statement of change of the equity.
Statement of cash flow
The movement of the cash during the specific period of the entity is shown in the
statement of the cash flow. The cash movement in the entity is easily understandable by the
users by this statement. The three section of the cash flow statement are: cash flow from the
statement, cash flow from the investing and cash flow from the financing activities
(NGUYEN and NGUYEN, 2020).
Noted to financial statements
It is the important statement that most of the people forget about. The information
related to the financial statement is disclosed by the entity for having the users the better
understanding and it is a mandatory requirement. For example, balances of fixed assets are
shown in the balance sheet.
Use of ratios in financial management
There are six ratios:
Liquidity ratios- The ability of the company is measured by using the current assets and
meeting the obligations of debt.
Solvency ratios- The financial viability for long-term is measured for the company. The ratio
compares the levels of debt to the equity, assets and annual earning of the company.
Profitability ratios- The ability of the company to earn profit with their associated expenses
is measured for the company.
Efficiency ratios- The use of company’s assets and liabilities for generating sales and earn
profits is measured with this ratio.
Coverage ratio- The ability of the company to service the obligations and debts is measured.
Market prospect ratios- Helps in predicting the earning from the specific investment in the
company by the investors (Gullett, Kilgore and Geddie, 2018).
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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 1,15,719
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
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Retained earnings 43,057
Total equity 83,815
Please fill in the shaded fields which are currently marked with a 0. You will need to use the correct mathemat
the answers.
Processes the business might use to improve their financial
performance
Expand your customer base
The more the customers the better the financial state of the business. The challenge
for the business is to make the way in which the customers are approaching to the business.
For expanding the customers base the first thing to know is keeping the current customers as
the customer retention is essential for the expanding the customers base. The business can
invest in tools that are used for marketing purpose to increase the customer count by
increasing the visibility of the business and increasing the traffic on the website of the
business. The challenge for the business is to maintain a balance between the investment
done by the company and the expected results of attracting customers to the company (Xie,
Huo and Zou, 2019). By word of mouth marketing along with the current customers the
business can perform a cost efficient and effective activity to improve the awareness of the
brand and attract more customers, this helps in increasing the financial performance of the
company.
Boost the conversion rate
The company can increase the traffic on the company’s website for increasing the financial
performance. If there are more visitors to your page than the customers the company need to
look at the situation and analyse. After the analysing the company need to make specific
changes so that the visitors on the company’s site are converted into the customers
(Suryoatmojo and et.al, 2018).
The company can also opt for some of the options for increasing the conversion rate for the
company. The company can use the CTAs (calls to action) for effectively converting the
people from visiting the product to purchasing it. In this time of era the people are afraid to
miss out on something by putting the discount on certain items for a limited period can
increase the sales of the company. The company have to use the right words along with
making it visually appealing so this strategy is cheap and the turns lucrative (Wang and
Yeung, 2017).
Consider Investments
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The company can be working on improvement while being on tight budgets, this makes the
improvement very challenging as the company have to extra careful for any kind of
expenditure but for the rise in the financial performance the company have to invest in
something. The company can invest in the real estate even if the values of the keep changing
but the real estate still hold some value. For this the company can observe the changes and
wait for the best time to get the deal that is profitable. The important thing to keep in mind
while investing in the real estate is to check the location, the investment in a property abroad
where the company can rent it or sell at the profitable rate or expand the business when the
financial state of the company gets stable (Tone and et.al, 2019).
The company can hire an expert for managing the set of rules set by the foreigners in the
market. Local experts can help the company to find different types of ownership, laws and
obligations for the preferred markets.
CONCLUSION
It can be concluded from the file that the term financial management plays an important role
in the business field. The setting up of the business or running of the business both requires
financial management for being successful. The objectives of the financial management are
discussed such as maintaining the supply of funds and utilizing the funds effectively for the
business. The different activities handled by the financial department like calculating the
capital required and the investment in the capital is discussed. The reasons for financial
management being important are discussed such as providing economic stability and
increasing the overall value of the business. The five fundamental statements are explained.
The uses of the sic ratios in the financial management is discussed. The financial ratios are
liquidity, solvency, profitability, efficiency, coverage and market prospect ratios.
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REFERNCES
Ameliawati and Setiyani, 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.
Gao and Han, 2021. Implications of Artificial Intelligence on the Objectives of Auditing
Financial Statements and Ways to Achieve Them. Microprocessors and
Microsystems, p.104036.
Gullett, Kilgore and Geddie, 2018. Use of financial ratios to measure the quality of
earnings. Academy of Accounting and Financial Studies Journal. 22(2). pp.1-12.
Hassanzadeh and Mashayekhi, 2019. A Conceptual Model for the Reasons and Circumstance
of Earnings Management in Iranian Banks. Accounting and Auditing Review. 26(3).
pp.371-393.
NGUYEN and NGUYEN, 2020. The impact of cash flow statement on lending decision of
commercial banks: Evidence from Vietnam. The Journal of Asian Finance,
Economics, and Business. 7(6). pp.85-93.
Osadchy and et.al, 2018. Financial statements of a company as an information base for
decision-making in a transforming economy.
Suryoatmojo and et.al, 2018, July. Implementation of High Voltage Gain DC-DC Boost
Converter for Fuel Cell Application. In 2018 International Conference on
Engineering, Applied Sciences, and Technology (ICEAST) (pp. 1-4). IEEE.
Tone and et.al, 2019. Modeling investments in the dynamic network performance of
insurance companies. Omega. 88. pp.237-247.
Wang and Yeung, 2017. How to expand and retain the customer base for a supermarket.
Xie, Huo and Zou, 2019. Green process innovation, green product innovation, and corporate
financial performance: A content analysis method. Journal of Business Research. 101.
pp.697-706.
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