Importance of Financial Management and Financial Statements for Business Finance

This report provides importance of financial management. Apart from this, it also explains the concept of financial statements and the uses of ratios in financial management. The report also includes an income statement and balance sheet for the year ended 31st December 2016. The importance of improving financial performance through professional advice, minimisation of outstanding debts, and rearranging expenses has also been discussed.

Business Finance

Table of Contents
Introduction......................................................................................................................................2
Section 1..........................................................................................................................................2
Section 2..........................................................................................................................................3
Section 3..........................................................................................................................................6
Section 4..........................................................................................................................................9
Conclusion.......................................................................................................................................9
References......................................................................................................................................11
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Introduction
Business Finance states about all the funds availing to the business so that they can meet their
needs of the business and Run their day-to-day operations such as purchasing goods assets raw
materials and other (Kraemer and et.al 2019). This report focuses on providing detailed
information about the concepts and importance of the financial management. Apart from this the
main financial statements has also been explained in this report and various uses of ratios within
the financial management. How organisation can improve their financial performance is also
being mentioned in this report.
Section 1
Concept and importance of financial management
Financial management plays a great role and it is one of the important aspects of any
company and business. If the organisation wants to run a successful business for long term basis
then need to manage financial management. As financial management provides a roadmap and a
path way achieve all the goals and objectives of the organisation and business.
Financial management department is responsible for managing organising and effective
way of allocating various funds to other departments. Financial management also assist
organisation to conduct financial planning and acquire funds which is needed by the organisation
funds can be acquired by various sources so that this will provide benefits to the organisation and
Company.
Importance
The key importance of financial management is that it helps the organisation to maintain
enough supply of funds so that organisation can conduct their day-to-day activities effectively.
The major objective of financial management is that it provides strategic planning organising
directing controlling of various financial undertakings to the company. It also helps the
organisation to apply where management principles are and also helps the organisation for fiscal
management and therefore Financial
Management is one of the important feature in the organisation (Jayadev and et. 2017).
Another importance of financial management is that it make sure that all the shareholders of the
organisation get good written in the form of dividend and yet capital appreciation as well so that
it will help the organisation to attract more new investors. Along with this financial management
can help the organisation to form different financial policies rules and regulations so that each
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and every member who is working in finance department they must know how they need to work
under different guidelines.
Apart from there is optimum and effective utilisation of different points can become
possible with the proper financial management? Along with this financial management also helps
the organisation to determined and know the overall amount of capital required it also helps the
organisation to structure the entire capital which is being used by the company for further
development and procedures.
Along with this financial management also provides detailed information about the assets
of the organisation are the assets completely used by the company or not and how much efforts
company has to make so that they can secure the assets. Apart from this then other importance of
financial management is that it helps the organisation to calculate the average capital
requirement and amount of points so that they can make policies as per their capital requirement
and they can know the overall expenses and profits of the organisation.
It is very necessary for the organisation that they must know the formation of capital
structure and its requirement they may have a lot of capital but it is very necessary to structure
them and use them properly. Another importance of this National management is that it helps the
financial manager to make a proper plan organise the financial funds and also obtain different
funds from different sources so that they can be analysed overall efficiency of the available
finance and also it can be useful for short term and long term objective of the organisation as
well.
However financial management help the organisation for conducting various forecasting about
the available finance and also it helps in analysing the ratios and risk management opportunities
and strategies of the organisation so that they can control over on cost and increase the
profitability and sales (Mburayi and et.al 2018). Apart from this Financial Management is
important because it helps the organisation to provide appropriate and diverse career to their
employees because employees are the most important asset for any organisation with the help of
employees they can achieve all the targets and task which is necessary for the company to
perform.
Section 2
Financial statements
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Financial statement plays a critical role in the overall development of organisation because it
conveys the financial health and position of the organisation. In short financial statements refer
to the written records which convey all the business activities and the overall performance of the
company in terms of finance (Bieliaieva and et.al 2020). It is very necessary for the organisation
that they must audited all their financial statements by accounting and government Agencies so
that company can know the accuracy of taxation financing and other purpose of investment.
Financial Statements popularly categorised into three parts such as balance sheet income
statement and cash flow statement.
Balance sheet
Balance sheet provides snapshot of financial health and position of the organisation.
Balance sheet States about assets liabilities and owner’s equity within the organisation. Assets of
the company includes all the resources which is been acquired by the organisation and assets also
shows that how much capable a company is so that with the help of current assets that can easily
repaired their short-term debts and obligations (Kautsar, and et.al 2019). On the other hand
liabilities show that how much fund has been acquired by the organisation from different
resources it can be short term in nature and long term as well. However balance sheet is known
as the summary of all the financial balance is of the company and Organisation it has to be
prepared by the entire organisation whether it is a sole proprietor, partnership, Cooperative and a
private limited company. The main purpose of preparing balance sheet is to record all the Assets
and liabilities of the company for a specific period of time so that after analysing the entire
balance sheet investors can make their decisions whether they would like to invest in the
company or not.
Income statement
Income statement is another important financial statement of the organisation which is being
prepared by each and every company whether it is a small or large in nature. Income statement
provides detailed information about the revenues incomes expenses and cost of the organisation
(Myende and et.al 2018). It is also necessary for the organisation to know that whether the
company is earning profit or loss for specific time duration. Is also necessary for the business
owner because it helps them to decide is it beneficial for them to increase revenues so that they
can generate profit and they should go for or reduction in cost or both will be beneficial for them.
Apart from this it is also helpful for the organisation to know the effectiveness and importance of
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all the strategies which has been set for the financial period and RBC strategies working in the
favour of the company or not. With the help of these strategies is the organisation earning profit
a loss can be determined by income statement.
Cash flow statement
Cash flow statement is most important statement of the entire financial statement for the
organisation because it provides the reason for the inflow and outflow of the cash within the
organisation. Cash flow statement is used to summarise the overall amount of cash and
equivalents of cash which is entering into the company on the other hand it also provides all the
information about the cash which is going out from the organisation.
Cash inflow and outflow can be happen by 3 activities such as financing activities investment
activities and operational activities (Çera, and et.al 2020). Apart from this cash flow statement
also used to measure the effectiveness of companies and the management that how effective they
are managing the cash positions which is being in the organisation.
Apart from this it also helps the management to determine that how they can repay their
obligations and loans and how we can minimise our operating expenses. Cash flow statement is
also important for making balance sheet and income statement because it provides the accurate
information about the inflow and outflow of the cash.
Uses of ratios in financial management
Financial ratios are popularly known as accounting ratios which is used for financial
statements. Financial ratios are being used by the managers so that no the stakeholders and
shareholders as well and it will also provide all the necessary details about the creditors of the
organisation.
Financial ratios provide efficiency of the organisation. Financial ratios are helpful and
useful and financial management because it provides overall understanding about the financial
results and Trends for specified time duration and it also help in analysing the overall
performance of organisation. Financial ratios can be used by the organisation to you know the
strengths and weaknesses by implementing different strategies and initiatives of the
organisations. Apart from this financial ratios also provide detailed information that how
company is using their assets to repay the liabilities. Apart from this ratio analysis can mark the
performance of the company for specified time duration and with the help of ratio analysis
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company can compare their position with the competitors and make certain changes in their
policies and plans.
Section 3
Income statement for the year ended 31st December 2016
2016
Turnover 3 1,89,711
Less cost of sales:
Material Cost 42597
Production Cost 15,231
Labour Cost 50,758
81125
Gross profit 108586
GP %
= 0.6
Less Expenses:
Administrative expenses 13751
Other operating overheads 22,374
Interest 1943
Total Overheads 4 38428
Profit/(loss) for the financial year 70518
NP
%=
64.
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Business review Template
The Net Profit for the year 2016,is£?(2015:£18,987,000).
TheCompany’skeyfinancialandotherperformanceindicatorsduringtheyearwereasfollows:
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2016
£’000
2015
£’000
Change
%
Turnover(continuingoperations) 189,711 179,587 +5.6
Profitfor the financial year 108586 18,987 +17.48
Shareholder’sequity 83802.
73
63,057 +32.9
%
Currentassetsas%ofcurrentliabilities 54.72 304% -
Customersatisfaction 4.5 4.1 +10
Averagenumberofemployees 649 618 +5
%
Turnoverfromcontinuingoperationsincreasedby5.6%duringtheyear, primarily
duetotheacquisitionoftheExtinguishersbusinesson1May2015,whichmadeafullyearscontri
butionin 2016.
Gross Profit = 108586
Net Profit = 70518
Net Profit increased in 2016by17.48 during the year.
Shareholders’equityincreasedby32.9%by 83802.73
Thecompany’s“quickratio”(CurrentAssets(excluding stock) divided
byCurrentLiabilities)is
CURRENT AASSETS = 87400-26400=61000/59800
=1.02
Thecompany’s“current ratio”(Current Assets divided by Current Liabilities. )is
CURRENT ASSETS = 87400/59800
=1.461
Balance sheet as at 31 December 2016
2016
Total
£0
Non Current
assets / fixed assets
Intangible assets 22,000
Tangible assets 1,54,400
Investments 15,000
1,91,000
Current assets/ short
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term assets (CA)
Stocks 26,400
Trade debtors 32,000
Short term deposits 15,000
Cash at bank and in
hand 14,000
87,400
Current liabilities/
short term liabilities
(CL)
Bank loans and
overdrafts 15,000
Trade creditors 35,000
Other Creditors 1100
Income tax payable 4,200
Other creditors
including tax and
social security
4,500
59,800
working capital(CA-
CL) 27,600 SHOWS
LIQUIDITY
Total assets less
current liabilities 2,18,600
Non Current
Liabilities
Bank loans 30,200
Other Liabilities 16,000
Mortgage 46,200
0
Provisions for
liabilities 9,200
Net assets 2,09,40
0
Capital and reserves net assets = total equity
Called up share
capital 25,000
Reserves 1400
Retained earnings 20,000
Total equity 46,400
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Section 4
As financial performance plays a greater role in the success of overall organisation because
it is very important to improvise the overall performance of the company so that company may
earn good return and profit. There are certain ways through which this organisation can improve
their financial performance and get good return and profit.
Advice from professionals
This company must hire some professional who have expertise in the field and they may
suggest better and appropriate strategies to this company so that they can generate more revenue
and profit. Professionals will guide the company how to improvise their overall cash flow and
how to decrease cash outflow so that organisation can get good grip over cash and cash
equivalents.
Minimisation of outstanding debts
It is necessary for the organisation that they must chase all the outstanding payments (Shapiro,
and et.al 2019). To know the outstanding loans of the organisation they may help the company to
earn higher profit. Apart from this, organisation can make certain terms and conditions so that
the overall debt can be minimised.
Rearranging of expenses
It is very important for the organisation that they must arrange their expenses and try to
produce them by rearranging all the expenses. Expenses can be arrange on the basis of payment
and there time duration for diet for large expenses update get proper time duration. Apart from
this it is very important for the organisation to know the cash flow as well so that by proper cash
incoming they may manage the expenses.
Conclusion
Analysing the entire report it has been concluded that this report focuses on Business Finance
and how organisation can apply proper Business Finance is being mentioned in this report. This
report provides importance of financial management. Apart from this with the help of global
financial management organisation can earn good profit. This report discuss the major financial
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statements and also liberates the use of ratios in financial management. This report also provide
calculation of income statement and various ratios. This report also elaborated various ways so
that organisation can improve their financial performance.
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References
Books and Journal
Bieliaieva, N., Krushelnytskyi, M., Voliak, L., Usata, N. and Sova, O., 2020. From survival to
business prosperity: The financial aspect of managing an organization in a
crisis. Independent Journal of Management & Production.11(9). pp.2275-2290.
Çera, G., Khan, K.A., Mlouk, A. and Brabenec, T., 2020. Improving financial capability: the
mediating role of financial behaviour. Economic Research-EkonomskaIstraživanja,
pp.1-18.
Jayadev, M., Singh, H. and Kumar, P., 2017. Small finance banks: Challenges. IIMB
management review, 29(4), pp.311-325.
Kautsar, A. and Asandimitra, N., 2019. Financial Knowledge as Youth Preneur Success
Factor. Journal of Social and Development Sciences.10(2 (S)).pp.26-32.
Kraemer-Eis, H., Botsari, A., Gvetadze, S., Lang, F. and Torfs, W., 2019. European Small
Business Finance Outlook: June 2019 (No. 2019/57). EIF Working Paper.
Mburayi, L. and Wall, T., 2018. Sustainability in the professional accounting and finance
curriculum: an exploration. Higher Education, Skills and Work-Based Learning.
Myende, P.E., Samuel, M.A. and Pillay, A., 2018. Novice rural principals’ successful
leadership practices in financial management: Multiple accountabilities. South African
Journal of Education.38(2).pp.1-11.
Shapiro, A.C. and Hanouna, P., 2019. Multinational financial management. John Wiley &
Sons.
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