Financial Management and Use of Ratios in Business Finance

BUSINESS FINANCE

Table of Contents
Section 1 : Introduction and Importance of financial management.................................................3
Introduction of financial management.........................................................................................3
Importance of Financial management..........................................................................................3
Section 2 : Describe the main financial statements and explain the use of ratios in financial
management.....................................................................................................................................4
Main Financial Statements...........................................................................................................4
Use of ratios in financial management.........................................................................................5
Section 3: Business Performance Review........................................................................................6
i)...................................................................................................................................................6
ii)..................................................................................................................................................6
Iii).................................................................................................................................................6
iv).................................................................................................................................................6
Section 4 : Discuss the process business might use to improve their financial performance..........7
REFERENCES................................................................................................................................1
Appendix..........................................................................................................................................2

Section 1 : Introduction and Importance of financial management
Introduction of financial management
Financial management (FM) is an implementation of general management principles for
the decision-making related to financial activities. It includes financial planning, organizing,
directing & controlling in a way that firm achieves their goals successfully & earn maximum
profit. It is concerned with costs, credits, cash flow & profitability of the co. so that they evaluate
that available resources of the co. & how many resources has required to achieve business goals
(Dwiastanti, 2017). For ex. Financial management is used for business or company in managing
employees expenses, purchasing of new machine, project budget and so on.
Importance of Financial management
 Financial planning : FM is very important in financial planning for every organisation.
It describes the financial needs & available resources of the company. It also give advice
about the effectively use of that resources through analysing various available
alternatives to the co. FM study all crucial area in detail concerning about company target
& help in achieving that goals successfully.
 Allocation of funds : FM is also played important role in allocation of funds
appropriately in an organization. Effective use of funds give firm maximum profit and
success through reduce cost & expenses. Without effective financial management no
organization can use its fund properly. Allocation of funds means distribute funds of a
company in most profitable investments from available alternatives.
 Valuation of a company : FM is important in valuation of a company. It means the firm
expand its area of business in other countries and increase their production for earn
maximum profit. It also increases the efficiency of the company. A top-level management
advice co. in improving valuation of a company (Holynskyy, 2017).
 Investment opportunities : Financial management helps any person in exploring various
investment opportunities. Investment in any assets is analysed on the basis of risk
attached with that assets & expecting of return in future period is evaluated through the
financial management. Various investment opportunities are investing in gold, mutual
funds, stock, land & property etc.
 Safeguarding of funds : Business has more than one project. Investing in more than one
project is difficult & crucial decision for any company. FM helps the co. to distribute

funds in various projects through analyse the task of the project & according to that funds
are allocated. If companies funds are not proper allocated it may lead to huge financial
losses to the co.
Section 2 : Describe the main financial statements and explain the use of ratios
in financial management
Main Financial Statements
Financial statements is the presentation of overall financial position of the company. It
shows manager true & fair view of the company position during a period. It collects all business
data for formulating financial statements. There are three main financial statement- income
statement, balance sheet & cash flow statement that are described below :
 Income Statement
Income statement is also termed as profit & loss statement that is summary of business profits
and losses during a period generally one year. It also prepares in monthly or quarterly basis. It
shows the company overall performance through concerning sales revenue at first then deduct
the cost of goods sold to find gross profit. From gross profit deduct other operating expenses it
shows co. net profit.
Key features:
 It used to calculate profitability of the co.
 It shows the revenues & expenses of the co. over a period of time.
 It is based on accounting principles such as matching & accruals to represent figures.
 It is the main basis of financial statements with the help of this other statements are
prepared.
 Balance Sheet
Balance sheet is a financial statement that shows a company owned assets, liabilities and
shareholders equity amount in the company. It is used by company with the other financial
statements for analyse business performance and calculating ratios (Hasanaj and Kuqi, 2019).
The assets & liabilities are allocated on the liquidity basis that means most liquid asset (cash) are
entered at top on asset side and so on. Net income from the income statements comes under the
balance sheet as a change in retained earnings.
Key features:
 Balance sheet has three sections such as assets, liabilities & shareholders equity.