Importance of Financial Management and Ratio Analysis in Business Finance

Business Management with Foundation
BMP3005
Applied Business Finance
The concept and importance of financial
management and the processes businesses
might use to improve their financial
performance
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Contents
Introduction 3
Section 1: Definition and discussion of the concept and
importance of financial management 3
Section 2: Description and discussion of the main financial
statements and explain the use of ratios in financial
management 4
Section 3: Using the template provided 5-9
i. Completing the Information on the ‘Business Review Template
(Ensure that you display your calculations for this detail)
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ii. Using Excel producing an Income Statement for the Sample
Organization (see Case Study). This should be included within your
appendices 7
iii. Using Excel completing the Balance Sheet 8
iv. Using the Case study information describing the profitability,
liquidity and efficiency of the company based on the results of ratio
analysis 9
Section 4: Using examples from the case study describing
and discussing the processes this business might use to
improve their financial performance 9
Conclusion 9
References 11
Appendix 12
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Introduction
Business finance is crucial term in the profession. In most businesses cash is
needed. Cash is needed to acquire the fixed assets, purchase of raw material and
operates daily activities. It is the backbone of any organization. It is necessary to growth
of the business. It means the cash are available by entrepreneur to meet the daily
expenses. Funds in business are necessary for the business purpose. The owners of the
business can finance through various places like as investors, grants from the public
department, loan from bank and crowdfunding. It is also known as lifeblood of the
business (Bulut, 2022). In this report discuss about the importance of management of the
funds and preparation of funds statements. Further in this report to analyses the financial
ratios of the company.
Section 1: Definition and discussion about the concept and
importance of financial management
Management of funds is a managerial activity that is needed to plan and control of
the enterprises 's fund resources. It is planning , financing and managing the assets to
maximize the worth of business organization. The positive cash flow is more important in
compare to book profit. It also explain as planning for the future of a business enterprise
to determine the positive cash flow. Financial management manages the fund in the
business. It helps in taking decision of purchasing within a year and for the period more
than short period credits for the business. The two important terms that need to explain
in management of funds such as:
Procurement of funds- It could be obtained in different ways. Its very difficult term in the
business. The sources of funds like debentures, venture capital and commercial loans .
In a dynamic environment, the business is not depend on the available ways of finance.
The business owner chooses the creative sources of funds that are helping in the modern
businesses to survive.
Utilization of funds- The funds manager is responsible of application of funds. It checks
that all the financial borrowings are at best price and consider the risk. If the finds are
not used in the proper way, they generate an income higher to the cost of obtaining them,
there is no point in running the business. The funds are utilized to acquire fixed assets
and working capital (Exposito and et.al, 2018).
The importance of funds managing cannot be over-emphasized. It is the important
implication in the enterprises. If in the organization there is no efficient administration
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then business cannot survive till long term. It has been several reasons that funds
management is crucial in the business. They are as follow:
 It helps business in financial planning.
 It improves the performances of the fianances of the enterprise.
 It protects the finances to achieving the business goals.
 It raises the worth of the organization.
It increases the manufacturing at minimum costs (Ghosh and et.al, 2018).
Section 2: Description and discussion of the main financial
statements and explain the use of ratios in financial
management
Statements of finance are written documents which helps in enterprises activities and
the performances of the finances of the business. Such statements are audited by firms
and accountants owned by the government. The main goal of financial statements
provide the position of the finances , performance and cash flow in the businesses which
is useful for taking decision. The financial statements contain the:
1. Balance sheet- It portrays value of economic resources controlled by an
organization. It also provides information about liquidity and solvency of an
enterprise which is useful in predicting the ability of the enterprise to meet
its financial commitments as they fall due. It describes the assets, liabilities
and shareholder funds of the company. The total assets is equal to liabilities
and shareholder fund. It evaluates the business condition. To use balance
sheet company calculates the financial ratios. The assets and liabilities can
be classified into two parts such as non current and current. Non current
means which retains in the business for long time, current means that are
hold in the business for short term (Girardone and et.al, 2021).
2. Profit and loss account- It shows the results of activities of an enterprise
for a fiscal year, it shows the performances of an enterprise, in particular its
credibility. It includes its income, costs and expenses that incurred in the
given time period. These statements generate the information that the
enterprise ability to earn profit. These are prepared as a cash basis or
accrual basis. It compares the profit and loss account in various accounting
period. It is also known as statement of financial results. It provides up and
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