Financial Management and its Importance in Business

BUSINESS FINANCE

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
SECTION 1.....................................................................................................................................3
Financial management and its importance..................................................................................3
SECTION 2.....................................................................................................................................4
Financial statements and significance of ratios...........................................................................4
SECTION 3.....................................................................................................................................6
Information given through business review template..................................................................6
Description of ratios....................................................................................................................6
SECTION 4.....................................................................................................................................7
Ways of improving financial performance..................................................................................7
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9
APPENDIX....................................................................................................................................10
Business review Template...............................................................................................................11
Notes to the financial statements..........................................................................................12
at 31 December 2016..................................................................................12
Excel sheet.................................................................................................................................14

INTRODUCTION
The study is on financial management and its use in organisation. Financial management is the
planning and use of finance component in organisation in a manner which does optimum
utilisation of resources and tells the best method which will be suitable for investment. The study
discusses the concept of financial management, its use in organisation and how organisation can
find ways to improve the financial performance. The report discussed the main financial
statements used by the organisation and the ratios being used in financial management. The
ratios have been described how they reflect the company’s performance.
SECTION 1
Financial management and its importance
It is an important aspect in organisation and for doing business successfully, financial
management is of utmost importance. Finance management means planning strategically, giving
direction and control of undertaking of financial activities in an institute. Managing the financial
assets is also a role played by it in the organisation. Financial management has these objectives:
a) Maintenance of fund supply for the organisation
b) Assurance to organisation’s investors for getting returns which are beneficial on investment
made.
c) Usage of funds which is correct.
d) Creation of investment opportunities which are safe (Akan and Tevfik, 2020).
Financial management includes these elements:
a) Financial planning: The process of calculation of capital amount which is required for an
organisation and then defining its allocation. Financial plan shall include:
a) Determination of amount of capital to be needed for operations.
b) Determination of organising capital structure.
c) Financial policy making and framing regulations.
b) Financial making of decisions: It involves financing and investment talking of
organisation. Decision is taken by organisation of raising finance on when new shares
have to be sold and when profit distribution take place.

c) Calculation of capital: Financial manager calculate funds which will be required by the
various departments of the organisation and the amount estimation is done in a way
which also anticipates the increase in earnings of the organisation as time passes on.
d) Capital structure formation; As the amount of capital is estimated, the capital structure
requires formation. It has involvement of debt and equity in long as well as short term.
The amount required to be raised by sources of external finance is also decided in this
aspect (Bailey, 2017).
e) Investment of capital: Investment is required by every organisation to grow and make
profits. Thus, it is necessary to invest the company funds which go in right direction and
bring returns for the company and its investors.
f) Profit allocation: As the organisation gathers profits, financial management has to
allocate the same.
g) Effective money management: The money required in various functions like bill
payments, maintenance of stock and covering up current liabilities has to be performed
under financial management. Also, since time value of money concept is used in financial
management, techniques like NPV and IRR help in taking right decisions and save costs
thus managing money for operations (Akan and Tevfik, 2020).
SECTION 2
Financial statements and significance of ratios
The financial statements of use in organisation are Balance sheet, Income statement and Cash
flow statement. Balance sheet is also known as Statement of Financial position. It depicts the
assets on one side and liabilities on the other. Assets include long term as well as short term also
known as current assets. Liabilities include short term as well as long term liabilities which are
payable by the company. The accounting rule states that assets side has to match with liabilities
side. Assets are shown also of fixed assets like land and building, machinery which are
considered to be resources for organisation. Also are registered accounts receivables and
payables in the balance sheet which shows company’s credit due and self-credit returns owed.
Investors look for current assets and liabilities section in balance sheet of the past five years and
make mind for investment. This also gives information of dividends paid by the company.

Income statement is the statement depicting profit and loss of the company. It gives an insight of
the revenue earned, cost of goods for the company, gross profit thus made. It gives insight of
variable and fixed expenses along with overhead costs and selling and administrative expenses. It
lastly gives the net income when all expenses have been deducted from revenues. This statement
is of utmost importance because of net profit which is the important factor regarding investment
and the efficiency of company in keeping check of operational costs.
Cash flow statement talks of cash inflows and cash outflows and tells about the sources of
income and source of expense that is where money comes in and goes out. It tells how
effectively organisation uses money and whether cash inflow is more than outflow which means
money is sufficient for operations. It also tells which projects have been generating investment as
returns and which projects are undergoing now which need money or cash outflow (Bailey,
2017).
The financial ratios depict the financial status of the company and thus are of importance for
investors and management to see how well the company is performing. The leverage ratios
indicate the financial health of the company. It tells whether the company has sufficient equity in
comparison to debt or not. This means company is able to manage its finances in a correct ratio
and can fulfil financial needs with mixture of both. Examples are debt to equity ratio and long-
term debt to capitalization ratio etc.
Profitability ratio gives indication of organisation to contain operational costs and generate
profits. The ratio is important as bottom line for investors to check on company’s profitability to
check on past five years whether it is able to pay the dividends by profit generation or not.
Examples of profitability ratios are gross profit, net profit, return on equity etc.
Asset management ratios help in determining how well company uses its assets for generating
sales. It helps having a check on credit policy whether it needs renewal or not and also how well
company is at inventory management (Schoenmaker and Schramade, 2018). For example,
inventory turnover, receivables collection period, account payables etc.

SECTION 3
Information given through business review template
Particulars 2016
£’000
2015
£’000
Change
%
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 been calculated Turnover less cost of sales and less total overheads
which comes to be 43057.
The change in profit is calculated as 43057-18987= 24070 which divided by base year 2015 net
profit multiplied by percentage gives value 126.77%.
Shareholder’s equity increased by 32.9% , thus 132.9% of 63057 gave value 83803.
Current assets value as percentage of current liabilities is 0.5472%
Gross profit is sale of goods-cost of sales which is 189711-108586 equal to GBP 81125.
Net profit is gross profit-total overheads which is 81125-38068 equal to 43057.
Net profit has increase by 126.77%.
Shareholder’s equity got increased by 83803-63057=20746.
Company’s quick ratio= Current assets/ current liabilities which came to be 84349-
28571/37928=1.47
Company’s current ratio is 84349/37928=2.22
Description of ratios
Profitability ratio: It can be seen that company’s profit has increased considerably with 126%
increase in net profit margin which means company’s operations have been successful in
converting revenue to profit and control operational costs (Schoenmaker and Schramade, 2018).