Financial Management and Importance in Business

This document discusses the importance of financial management in business and how it helps in decision making and profitability. It covers topics such as financial planning, procurement of funds, utilization of funds, and financial decisions. It also discusses financial statements and the use of ratios in analyzing a company's financial performance.

Business

Table of Contents
Table of Contents.............................................................................................................................2
INTRODUCTION...........................................................................................................................1
SECTION 1.....................................................................................................................................1
Financial Management and its Importance..................................................................................1
SECTION 2.....................................................................................................................................2
Discussing financial statements and use of ratios........................................................................2
SECTION 3.....................................................................................................................................6
CONCLUSION................................................................................................................................8
REFERENCES................................................................................................................................9
APPENDIX....................................................................................................................................10

INTRODUCTION
The capital and equipment that what a group represents to accomplish its aims and
ambitions is referred to as corporate finance (Apa, Grandinetti and Sedita, 2017). From the
procurement of basic materials to the delivery of items and services to clients, firms require
financing. The acquisition of assets for the aim of meeting market requirements is referred to as
commercial finance. It supplies money for company operational expenditure requirements as
well as financing flexibility. This research includes money planning and selling price. There are
also differences in the balance sheet and the usage of ratios in revenue recognition.
SECTION 1
Financial Management and its Importance
The technique of managing an institution's money and accountancy processes is known as
economic administration. It guarantees that money are accessible to satisfy day-to-day corporate
requirements and that monies are spent wisely. Financial planning comprises, among many other
aspects, deciding on acquisitions, permanent quantitative easing, and revenue streams. It helps
with economic planning activities, structure, and administration. It also involves judgments on
investor returns on capital. It gives relevant data about the corporation’s profit or losses, and
expenses, enabling them to make educated choices. Management will be able to monitor
wherever the corporation's money is going and will also be able to save money. For the reasons
listed, fiscal planning is fundamental to a business's success:
Financial Planning: Economic administration help in the structuring of a company's
finances. It comprises, among many other aspects, arranging for company resources, budgeting,
and finance necessities. It helps companies prepare for difficult scenarios that happen as a
consequence of external factors. Finance planning aids firms in achieving their stated goals. It
controls the pricing, expenditure, credits, and earnings of the company (Babic, Fichtner and
Heemskerk, 2017).
Procurement of funds: Financial planning assists the business in collecting finances
from less revenues are generated that are suitable for the business size. For a business employee
to run efficiently, it needs money. It guarantees that money is accessible when a business
requires them. It is required for everyday activities, acquiring, debt payments, and input
materials purchasing, among some other factors.

Utilisation of funds: Financial planning assists a corporation's manager to make the
greatest use of resources by efficiently providing funding. It gives funding dispersal statistics
enabling firms to identify where the cash is spent and minimising costs.
Financial decisions: Economic reporting assists companies in determining economic
laws that influence the functioning of the company. So all of an element of the firm require
finances, investment choices will have an effect on the rest. Such decisions help the organization
to achieve its long-term goals.
Increase profitability: Corporate finance assists in the effective utilisation resources in
order to improve a company's economic performance financial plan, economic evaluation, as
well as other techniques are used to increase company's value by cost containment. Workers are
also encouraged to save, cutting the cost of obtaining funds (Cassell, Cunliffe and Grandy,
2017).
SECTION 2
Discussing financial statements and use of ratios
Balance sheet:
Amount
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.
Retained earnings 43,057
Total equity 83,802
Business review:
2016 2015 Change
£’000 £’000 %
Turnover (continuing operations) 1,89,711. 1,79,587. 5.60
%
Profit for the financial year 43057 18,987 126.7%
Shareholder’s equity 83802. 63,057 32.9
0%
Current assets as % of current liabilities 222% 304% -
82%
Customer satisfaction 4.5 4.1 1

0%
Average number of employees 649. 618. 5
%
Gross Profit = £81125.
Net Profit = £43057.
Net Profit increased in 2016 by 126.7 during the year.
Shareholders’ equity increased by 32.9% by £83802.
The company’s “quick ratio” (Current Assets (excluding stock) divided by Current Liabilities)
is 1.47:1
The company’s “current ratio” (Current Assets divided by Current Liabilities.) is 2.22:1.
Calculations:
Gross profit = sales – COGS = 189711 – 108586 = 81125
Net Profit = Revenue – total expenses = 81125 – 38068 = 43057
Profit = 43057 – 18987 = 24070
Current ratio = current assets / current liabilities = 54349 / 37928 = 2.22:1
Quick ratio = (current assets- stock) / current liabilities
= (84349- 28571) /37928 = 1.47:1
Equity = 63057 / 20745 = 83807
Increase in profit = 63057 / 32.9% = 20745
Financial reports are measurements that help a firm run a budget cycle and provide a
thorough picture of the firm's economic standing and performance. Several types of economic
reports which assist in the development of processes and activities are as follows:
 Income statements- This quote illustrates an organization's ultimate performance, as
well as its efficiency and the resources required to attain that outcome. The cash flow
statement validates the financial position of the firm by showing precise revenues and
expenses. This is an important part of evaluating income and costs because to swings in
operating expenses, R&D costs, and cost of raw materials that affect the corporation's
performance (Fink, Yogev and Even, 2017).

 Balance sheet- This is an important part of fiscal reports since it displays the
corporation's ultimate condition by portraying administration in a plain and clear manner.
It comprises profits and losses, and also financial ownership, all of which had to be
equivalent at the completion of the computations. These observations showed that
commodities, which reflect financial resources, are comparable to loans and investment.
As a consequence, the sides of a balance sheet should be similar, as per the fundamental
idea of Asset = Liabilities.
 Cash flow statements- This report concentrated on a firm's cash revenues and
disbursements over a specific time period. The operational, investment, and refinancing
accounting information indicate how much cash is spent out now and receiving in from 3
primary sorts of activity. Such methods compute and evaluate a firm's financial position,
making it much easier for experts and investors to make the correct assessments of the
outcomes. This makes it easier to make educated managerial decisions and prevent
investment burden. The paper highlights the buying capacity, that show how successfully
the company will be able to meet its debt commitments and operation cost.
Ratios are a type of computation that is used to determine the viability and solvency of a
corporation's financial statements. They cover a wide variety of computations. Some instances of
how ratios are utilised in economic administration are as follows-
 Helps in comparison- Coefficients are quite beneficial in giving a company with a
comparative perspective that really can aid in making prompt measures. Potential
investors analyzed it in possible to correlate prior year's outcomes to present year's
success.
 Useful in decision making- They are ready to support managers in formulating sound
financial judgments and implementing appropriate steps. Researchers can make
inferences depending on them because these offer valuable knowledge about the
corporation's achievements.
 Supports in forecasting and planning- These are incredibly useful in money
management as well as anticipating upcoming scenarios and responsibilities by checking
the amount of decades. They help to provide necessary knowledge to buyers and
stockholders so that they may design their asset allocation. This provides interested

stakeholders with an investment in the firm with a better grasp of its spending habits
(Gielnik, Zacher and Schmitt, 2017).
SECTION 3
Net profit ratio: The profitability, also known as the net margin, indicates how often net
revenue or gain is generated as a proportion of total revenue. The proportion of a corporation's or
corporate section's net earnings to sales is known as the profit margin. It is usually represented
as, a percentage but it can be expressed as a binary point. The net profit margin company makes
after paying a company makes per dollar of income. It is a metric for determining a company's
financial performance. It calculates a company's financial performance by deducting all of the
firm’s earnings from total sales.
Net profit margin = 43057 / 189711 * 100
= 22.69%
Gross profit: Economists calculate the cash flows over for deducting the cost of goods
sold from sales revenue to determine a company's financial position (COGS). The gross margin,
also known as the operating income ratio, is generally represented as a percent of sales. This
quantitative indicator is used to represent an institution's profitability in its functional areas. It is
determined by deducting current economic expenses from its net sales (Giessmann and Legner,
2016).
Gross profit margin= 81125 / 189711 * 100
= 42.76%
Current ratio: The current ratio is a financial ratio that evaluates a business's capacity to
satisfy brief commitments. The current ratio is a metric for determining a company's financial
position. The proportions that are currently regarded appropriate vary by sector. In so many
circumstances, a lender prefers a higher current ratio over a lower current ratio since a higher
current ratio indicates that the company is more liable to complete the borrower. Large current
ratios aren't always a good thing for shareholders. If a current ratio of the company is
extraordinarily high, it could indicate that such current assets or brief banking services are
underused. The liquidity ratio assures that even a company's ability to repay is evaluated in terms
of brief liabilities. It encompasses all current liabilities and assets. If current liabilities exceed
current assets, the current ratio will be less than one. If the average figure is below 1, the
company may struggle to meet its quick responsibilities. Some businesses, on the other hand, can

operate with such a liquidity ratios of the less than one. The firm’s current ratio can easily remain
under one if sales increase into money quicker than accounts receivable is due. The expense of
purchase is used to people acquire, with the intention of selling it for a greater price. As a
consequence, the transaction will generate significantly greater revenue than that of the financial
statement sales revenue. Businesses which can collect payment from sales before paying its
vendors might justify low current ratio (Nadarajah and Kadir, 2016).
Current ratio = Current assets / current liabilities
= 54349 / 37928
= 2.22:1
Quick ratio: The quick ratio is a measurement of a corporation's capacity to meet brief
liabilities of its most financial cash, and it provides insight into its quick liquidity situation. It
also is referred as the acid test since it demonstrates an organisation 's capacity to swiftly pay off
financial obligations with near-cash resources. The term "acid test" refers to a quick test that
produces prompt results. It depicts a short - term liabilities financial condition and enables for the
estimate of its ability to repay brief borrowing. The acid test ratio is another name for it. One to
one is an excellent short ratio. The financial leverage is a metric for determining how liquid a
company is.
Quick ratio = (Current assets – inventory) / current liabilities
= (84349 – 28571) / 37928
= 1.47: 1
In respect to its basic objective, an institution's labour productivity generates a large
amount of earnings as per that ratio evaluation. It may be proven by looking at an organization's
gross profit margin, as the corporation has a high gross profit margin. The corporation, on the
other side, must increase its net profit margin, which can be assessed by lowering wasteful
spending. A corporation's economic situation is solid apart from just that. As a corollary, the firm
should increase efficiency by reducing superfluous costs and keeping sound financial
management, allowing it to raise its degree of business competency (Pal and Gander, 2018).
CONCLUSION
It can be said that there are a number of different aspects that has to be analysed and
evaluated in a very precise manner so that it can help the firm to grow and prosper in the long
run.

REFERENCES
Books and Journal
Apa, R., Grandinetti, R. and Sedita, S.R., 2017. The social and business dimensions of a
networked business incubator: the case of H-Farm. Journal of Small Business and
Enterprise Development.
Babic, M., Fichtner, J. and Heemskerk, E.M., 2017. States versus corporations: Rethinking the
power of business in international politics. The International Spectator, 52(4), pp.20-43.
Cassell, C., Cunliffe, A.L. and Grandy, G. eds., 2017. The SAGE handbook of qualitative
business and management research methods. Sage.
Fink, L., Yogev, N. and Even, A., 2017. Business intelligence and organizational learning: An
empirical investigation of value creation processes. Information & Management, 54(1),
pp.38-56.
Gielnik, M.M., Zacher, H. and Schmitt, A., 2017. How small business managers’ age and focus
on opportunities affect business growth: a mediated moderation growth model. Journal
of Small Business Management, 55(3), pp.460-483.
Giessmann, A. and Legner, C., 2016. Designing business models for cloud platforms.
Information Systems Journal, 26(5), pp.551-579.
Nadarajah, D. and Kadir, S.L.S.A., 2016. Measuring Business Process Management using
business process orientation and process improvement initiatives. Business process
management journal.
Pal, R. and Gander, J., 2018. Modelling environmental value: An examination of sustainable
business models within the fashion industry. Journal of Cleaner Production, 184,
pp.251-263.

APPENDIX
Income statement:
Amount
Turnover 3 1,89,711.
Less cost of sales:
Material Cost 42,597.
Production Cost 15,231.
Labour Cost 50,758.
1,08,586..
Gross profit 81,125..
GP %
= 42.8
Less Expenses:
Administrative expenses 13,751.
Other operating overheads 22,374.
Interest 1,943.
Total Overheads 4 38068..
Profit/(loss) for the financial
year 43057.. NP%= 22.7