Financial Management: Concept, Importance, and Financial Statements

This document provides an overview of financial management, including its concept, importance, and the use of financial statements and ratios. It also offers ways to improve financial performance. The subject is Financial Management, and the course code is not mentioned. The document type is an essay or research paper, and there is no specific assignment type mentioned. The content is relevant for students studying finance or business management in any college or university.

Financial Management

Contents
Introduction.................................................................................................................................................3
Main body...................................................................................................................................................3
Concept & importance of financial management.....................................................................................3
Financial statements and use of ratios in financial management..............................................................4
Business Review Template......................................................................................................................6
Ways to improve financial performance..................................................................................................9
Conclusion...................................................................................................................................................9
References.................................................................................................................................................10

Introduction
The business finance is a core aspect in the organization. It is a foundation of the business
which involves the financial management. Financial management is divided into two parts where
financial means management of money including the activities of investing, borrowing, lending,
saving etc. It is method of handling and manipulating assets as well as other financial powers.
This field is primarily concerned with the acquisition of valuable raw materials, properties, and
useful materials that aid in the increase of a company's financial value whereas management term
refers to the planning, organising, directing and controlling the activities in the organisation
(Aprilia 2020). The finance can be personal, corporate or government. Hence the term financial
management refers to the planning, organising, arranging, managing, coordinating, and
controlling a company's financial operations. Every organization has a requirement of fiancé for
purchasing of assets, goods, raw materials and other flow of economic activities. It also applies
management principles to financial resources. Financial management involve those activities that
related to the acquisition and conservation of capital funds in meeting the needs and objective of
financial business enterprise.
Main body
Concept & importance of financial management
The financial management is the functional area in the organization concerned with the
profit, expenses, cash and credit so that organization can meets its requirement and achieves
objectives. Financial management entails determining how an organization will financial
institution for different purposes, allocating those funding in the most effective and profitable
manner, having power across those resources, and disbursing the cash reserves' distributions to
various parties. Financial management generates value and operational capability as finance is
concerned with the assessment, reporting, and supervision of sustainable growth and it is
essential to the smooth functioning of industries and markets. It is a base for maximizing the
value of firm for stakeholders which is associated with the short term working capital
management involving current assets and current liabilities. Financial management is concerned
with acquisition and financing of short and long term credits for the managerial decisions of the

company. It is a important part of accounting as it entails the creation and application of financial
values that helps an organization in achieving primary objective, and increase the company's
value. Financial management also includes debt financing, financial reporting, and information
gathering and interpretation in order to make informed decisions. The financial management
reduces the finance cost by ensuring sufficient availability of funds (Awaysheh and et.al., 2020).
The importance of financial management is very important in the company as it provides
funds keeping objectives in mind where funds are procured by various institutions. The financial
management provides accurate financial reporting for decisions by having economic stability
which encourages employees for saving money. It helps the company in allocating and utilizing
the resources of funds. There is increase and improvement of organization performance
efficiently. The financial management reduces the cost of funds by ensuring proper use of funds.
The shareholder wealth is increased having information on financial reporting. Financial
management guarantees that a company can cover the daily costs, including paying employees'
salaries, keeping adequate goods on target to assist consumers' needs, and setting aside enough
money for acquisition and growth.
Financial administration maintains business strategies for acquisition and planning
projects, ensuring sustainability and prosperity. There is Better disposal of surplus through
financial management manager’s takes decisions on how to use the surplus funds and determine
in which activities funds are needed. It also determines if the money should be paid as executive
bonuses or kept to reinvest in the company. in financial management financial analysts keep
track of all capital income and expenses in a company. They guarantee that there really is no
cash shortage or excess (Bataev 2018).
Financial statements and use of ratios in financial management
The financial statement refers to the financial report of recording financial activities and
position of the business entity. It reflects the financial position, performance that s useful in
decision making. These statements are used by the government agencies, accountants and firms
for ensuring the accuracy, tax financing and investing purpose. Financial statement is
summarized descriptions of specific data and therefore is a method of study. The ability to
include information in a concise format influences the types of records consultants write, the
manner they organize things on these reports, and their accounting requirements. The financial

statement's involved parties believe that the principles displayed in the financial statements are
real and complete. Financial statements aid in evaluating actual costs, earnings, revenues,
obligations, and properties over the course of the accounting year, allowing for more informed
decisions to improve competition. It is in a form of written statement. The statement is divided
into three parts income statement, balance sheet and cash flow statement (Chen and et.al., 2018).
 Income statement- It is also known as profit and loss account reflecting the financial
statement of the company by showing the revenue and expenses during a particular period.
It shows the profitable position of the company. It helps the employees by disclosing the
business value. It includes all financial activities over which the company is accountable.
The revenue statement, besides the balance sheet and income declaration, aids in the
understanding of the company's financial fitness. An income statement represents a period
of time used by the investor and mangers for knowing the company made profit or loss in a
period. It is prepared with the comparison of two to three years of data.
 Balance sheet- It refers to the statement of financial position summarizing the financial
balance of individual or company. It involves the assets and liabilities. The difference
between the assets and liabilities is known as net worth or capital of company. This has
been the most important financial document because it explains what time is valuable and
how it is invested in such an organisation. In one side of the balance sheet are securities,
and on the other side are liabilities. Each sides (liabilities and assets) should equal (Assets =
Liabilities + Equity) for the accounting records to represent the true picture. The balance
sheet helps in indentifying the how assets are funded with liabilities and additional capital
paid. The assets are in the form of liquidity. Liabilities reflect in order that is to be paid by
the company. The items involved in balance sheet are assets consist of cash and cash
equivalents, accounts receivables and inventory. Liabilities consist of debt, wages payable,
and dividends payable. The balance sheet is prepared once in the year by the end of
accounting year revealing the net worth of the business (Kumari and et.al., 2017).
 Cash flow statement- It refers to the change in balance sheet and income affecting the cash
and cash equivalents. It defines the flow of cash in and out of the company. It is used for
determining the short term profitability and ability to pay bills. The cash flow statement
reorders and organizes the facts from the corporation's accounting records into three major
parts: financial expenses, investment activities, and funding activities. The purpose of this

statement used by the investors for knowing how company operations are running and from
what sources the funds are coming in which ways they are spent. It is divided into three
parts comprising of operating activities, investing activities and financing activities. The
operating activities the sources and use of funds for running business activities and sell of
products or services. The investing activities include the sources and use of cash from
company investment for long-term future. The financing activities involve the sources of
cash from investors or banks and cash paid to shareholders (Saona and et.al., 2020).
 Use of ratio in financial management
The financial ratio is used by the external analysts for determining the aspects of business
which reflects the profitability, liquidity and solvency of the company. It refers to the analysis of
financial information by using the financial statement of company. The ratio analyses are used
for making the comparison between the financial performances of the company. It improves the
decision of the company on position. The use of ratio also states the trend line of financial
performance by collecting data from financial statements and directs the future performance. The
use of ratio avails Credit to Shareholders may use the payment system to get a picture of the
firm, but they can have used that information continue providing extra spending for market
growth or to limit flexibility such that repayment can begin (Tang 2017).
The use of financial ratio helps in Trend line seeing how its profitability has evolved over
the years, and it also makes it possible to sustained market reports over a broad range of income
statements. This offers an understanding of service users, inviting people to maintain a good
perspective about just the business' culture and providing them with several advantages in
judging production. Trend analysts use this to calculate their efficiency through various financial
measures. The trend line states financial performance by collecting data from financial
statements and directs the future performance. It is also used for determining the operational
efficiency in the management of assets and liabilities.
Business Review Template
Gross profit ratio – It defines the ratio which measures the performance and efficiency of
company by dividing profit from total sales (Weetman 2018).
Gross profit ratios gross profit / sales * 100

Year 2016 2015
Gross profit 81125 80612
Net sales 189711 179587
GP Ratio 42.76 44.89
Net profit ratio- It is also known as net income of profit generated as a percentage of revenue.
The net profit is increased by 23% in 2016.
Net profit ratio Net profit / sales * 100
Year 2016 2015
Net Profit 45057 18987
Net sales 189711 179587
Net profit ratio 23.750336 10.5725916
Shareholder equity- Shareholder equity defines the amount of money return to shareholder
when assets are liquidated and all liabilities are paid off. It also involves the retained earnings
where dividend is not paid to shareholder. The shareholder equity in 2016 was 83802 which
increased by 32.9%
2016 2015
Shareholder equity 83802 63057
Current ratio- It refers to liquidity ratio which measures the ability of the company for paying
short term obligations which are due within one year with current assets.
Year 2016 2015

Current assets as % of current
liability
222% 304%
Quick ratio- It is also known as acid test ratio which measures the company ability to meet short
term obligations by dividing current assets into current liabilities. The quick ratio is 4.5 (Yamani
2019).
Income statement
The income statement is also known as profit and loss account. From this the company profit increased in
the year 2016 by 22%. In 2015 the profit was 10%. It reflects how further money was earned, invested on
various assets for acquiring the goods. The operating cost decreased with the difference of 6500.
Income statement
Particulars 2015 2016
Turnover form the
sales 179587 189711
Costs of goods sold
Material costs 38845 42597
production costs 12845 15231
labour costs 47285 50758
Gross profits 80612 81125
Overheads
Administrative
overhead 20251 13751
Operating costs 34293 22374 L
Interest 7081 1943

Net profit 18987 43057
Ways to improve financial performance
 Consolidate debt- It's critical to examine the existing corporate debt while looking at
options to boost every company's finances. If they have a lot of loans, consolidating that
may be a good idea. Refinancing the mortgage into a single instalment is also easier and
more cost-effective. Until agreeing to a new contract, do some homework and evaluate
various options.
 Recover outstanding payments- The unpaid invoices affects the financial performance
and cash flow of company. In this a debt collection policy can be used by reminding the
debtors for obligations regularly. When negotiating purchase deals, ensure the conditions
are straightforward on when refunds are expected and what happens if they are late
(Yasser and et.al., 2017).
Conclusion
The financial management practices on sales, profitability, and the corporate accounting
situation. The finance is the lifeline of business which helps in growth of the company. The
elements used in profitability are extracted from financial records, these analyses help ratio
research. The financial position, which includes both expenses and income, is used to determine
the viability of a company. Ratio analysis is a tool for measuring a company's cash balance,
profitability, including competition. To improve the financial performance the company should
consider the various external and internal factors.

References
Books and Journals
Aprilia, Z., 2020. Pengaruh locus of control, financial knowledge, dan personal income terhadap
financial management behavior pada karyawan KPP Pratama Blitar. SKRIPSI
Mahasiswa UM.
Awaysheh and et.al., 2020. On the relation between corporate social responsibility and financial
performance. Strategic Management Journal, 41(6), pp.965-987.
Bataev, A.V., 2018, September. Analysis of the application of big data technologies in the
financial sphere. In 2018 IEEE International Conference" Quality Management,
Transport and Information Security, Information Technologies"(IT&QM&IS) (pp.
568-572). IEEE.
Chen and et.al., 2018. The profitability effect: Insights from international equity
markets. European financial management, 24(4), pp.545-580.
Kumari and et.al., 2017. Linking earnings management practices and corporate governance
system with the firms’ financial performance: A study of Indian commercial
banks. Journal of Financial Crime.
Saona and et.al., 2020. How do the ownership structure and board of directors' features impact
earnings management? The Spanish case. Journal of International Financial
Management & Accounting, 31(1), pp.98-133.
Tang, N., 2017. Like father like son: how does parents' financial behavior affect their children's
financial behavior?. Journal of Consumer Affairs, 51(2), pp.284-311.
Weetman, P., 2018. Financial reporting in Europe: Prospects for research. European
Management Journal, 36(2), pp.153-160.
Yamani, E., 2019. Diversification role of currency momentum for carry trade: Evidence from
financial crises. Journal of Multinational Financial Management, 49, pp.1-19.
Yasser and et.al., 2017. The impact of ownership structure on financial reporting quality in the
east. International Journal of Organizational Analysis.