Importance of Financial Management in Business Finance

This article discusses the importance of financial management in business finance and provides insights into financial statements and ratios for better decision-making. It covers topics such as liquidity ratios, efficiency ratios, and profitability ratios. The article also suggests processes for improvement and highlights the significance of market analysis. Course code and college/university are not mentioned.

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Applied Business Finance

Table of Contents
INTRODUCTION ........................................................................................................................1
MAIN BODY...................................................................................................................................1
Section 2......................................................................................................................................1
Section 3:.....................................................................................................................................2
Section 4: ....................................................................................................................................7
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10
Appendix........................................................................................................................................11

INTRODUCTION
Business finance is related with having the significant availability about the resources so
tat effectual ability to meet the organizational requirements in effective manner can become
possible. In the current era, it is important for the firm to give emphasis on having reliable
evaluation of its financial resources so that appropriate form of decision-making can be exerted.
The current study will provide the information regarding the concept and importance of
financial management so that depth insights about the main financial statement can be derived in
financial statement along with the utilization of ratios. The particular utilization of the template
will offer the details regarding the profitability, liquidity and efficiency of the company based
on the ratio analysis so that depth understanding can be derived. This will provide the details
regarding the processes so that improvement in business for gaining financial improvement can
be attained.
MAIN BODY
SECTION 1
financial management is the business function that deals with investing available
financial resources in such a way that can allow getting good level of organizational success
(Prihartono and Asandimitra, 2018). There are distinct types of the ways in which financial
management tend to play significant role in financial management as offer the proper level of
guidance in making reliable planning. This provides the assistance in increasing organizational
efficiency, reducing the funds, use of fun, taking financial decision by considering proper
financial reports, saving funds, etc. it allows to identity the right type of sources of finances so
that meeting the organizational objective of having higher ability to meet the organizational
requirement can become possible. This permits to get the approach for identifying the reliable
action for the improvement can be provided.
SECTION 2
There are distinct type of the objectives of the organization which is required to be taken
into the consideration by the organization so that effective processing to have profitability and
sustainability (Al Muhairi and Nobanee, 2019). There are four main financial statements which
is helpful in gaining the appropriate level of information so that making strategic decision to get
higher ability to meet the appropriate kind of the strategic growth can be derived.
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 Balance sheet is related with offering the overview regarding assets, liabilities and share
holder's equity so that significant financial performance of the company can be
evaluated. It permits use to have concise ability to identify its liquidity, credibility, etc.
kind of the performance in turn making the strategic decision can be done.
 Income statement is concerned with having the information regarding the income earned
and expenses incurred for the particular duration so that its ability to earn profitability
can be recognized for making effectual decision.
 Cash flow statement is related with providing the insights regarding the in & outflows of
the organization so that its capability to pay debt obligations can be done easily (Brigham
and Houston, 2021). This permits to have greater approach to recognize that firm is
having proper operating, financing and investing inflows which can make its overall
position in reliable pattern which can contribute in making appropriate decision.
 The statement of changes in equity allows to records how profits are retained within a
company for future growth or distributed to the external parties of the organization.
There are various ways in which thee ratios is taken into the consideration so that proper
recognition regarding the trends can be done in proper pattern (Shim, 2022). In addition, o this,
it provides the assistance in gaining the right type of efficiency prevailing into the firm. Trend
line of its performance can be recognized in most accurate pattern so that existing lacking areas
can be recognized to get the ability to have higher profitability & stability. This helps in taking
the right type of the organizational decisions in turn better growth & development in firm can be
derived.
SECTION 3:
Business review template:
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The Net Profit for the year 2016, is £43057 (2015: £18,987,000).
The Company’s key financial and other performance indicators during the year were as follows:
2016
£’000
2015
£’000
Change
%
Turnover (continuing operations) 189,711 179,587 +5.6%
Profit for the financial year 43057 18,987 + 27.3 %
Shareholder’s equity 83815 63,057 +32.9%
Current assets as % of current liabilities 222.3 % 304% -82%
Customer satisfaction 4.5 4.1 +10%
Average number of employees 649 618 +5%
Turnover from continuing operations increased by 5.6% during the year, primarily due to the
acquisition of the Extinguishers business on 1 May 2015, which made a full year’s contribution
in 2016.
Gross Profit = £81125
Net Profit = £43057
Net Profit increased in 2016 by 27.3 % during the year.
Shareholders’ equity increased by 32.9% by £20758.
The company’s “quick ratio” (Current Assets (excluding stock) divided by Current Liabilities) is
1.47
The company’s “current ratio” (Current Assets divided by Current Liabilities.) is 2.22
Income statement:
(Attached in Appendix)
On the basis of the calculation it can be articulated that the firm incurs the different
types of the expenses which is helping the firm to gain the ability to get good level of the gross
and net profitability. The firm has 22.7% of net profitability and 42.76% of gross profitability
which show that ho well I operating in the industry.
Balance sheet
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Particulars Amount Amount
4

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
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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 83,815
From the assessment of the above prepared balance sheet it can be articulated that firm
is possessing significant level of assets and liabilities which is depicting its accurate and reliable
level of the organizational growth & development can be derived. On the basis of this, it can be
mentioned that firm is possessing effective level of the assets so that overcoming the current &
long term liabilities in effective pattern can be done in precise manner (Fridson and Alvarez,
2022).
Calculation of ratios :
Liquidity ratios
Particulars Ratio
Current ratio 2.22
Current asset/ current liabilities
Current asset 84349
Current liabilities 37928
On the basis of the presented ratio regarding liquidity it can be articulated that it is
helpful in identifying that how effectively it can use its current assets for overcoming current
liabilities in turn good organizational performance can be derived (Welc, 2022). The result is
reflecting that it is having good level of the current ratio which shows it accurate position in
respect to overcome the current liabilities.
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Particulars Ratio
Quick ratio 1.47
(Current asset- stock)/ current liabilities
Current asset 84349
Stock 28571
Current liabilities 37928
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From the evaluation of the above presented chart it can be articulated that there is good level
of quick ratio which shows that how effectively it is having the ability to use its cash in respect
to overcome the current liabilities (Rao, 2021). This is presenting that firm is having relevant
level of ratio in turn good organizational aspects to meet its effective performance.
Efficiency ratio
Particulars Ratio
Inventory turnover 3.80
COGS/ inventory
COGS 108586
Inventory 28571
It is very important for the firm to give emphasis on analyzing its efficiency ratio in turn getting
the appropriate approach to have to recognize its ability to meet the market forces can become
possible. From the assessment it can be articulated that the firm is having lower inventory ratio
which requires to be improved.
Particulars Ratio
Fixed asset turnover ratio 0.62
Revenue/ total asset
Revenue 43057
Total fixed asset 69298
On the basis of the assessment it can be articulated that the organization is lower assets
turnover ratio which can lead the firm towards failure so require to make changes.
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Profitability ratios
Particulars Ratio
Gross profit 42.76
(Gross profit / sales) * 100
GP 81125
Sales 189711
From the assessment it can be articulated that gros profitability of the firm is possessing 42.76
% which reflects that how the specific organization is deriving the profitability in turn better
growth & development can be attained.
Particulars Ratio
Net profit ratio 22.70
(Net profit / sales)*100
Net profit 43057
Sales 189711
From the evaluation of the above illustrated example it can be articulated that the net
profitability for the firm is 22.7% which depicts that organization is having the good level of net
profitability that indicates its good profitability position.
SECTION 4:
From the assessment of the provided information it can be said that firm requires paying
attention on identifying the reliable type of the changes it requires applying so that better
performance can be derived. On the basis of the income statement it can be said that firm is
having appropriate approach of gross and net profitability in turn good organizational outcomes
has become possible for the enterprise. This shows that firm need to emphasize on getting the
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insights regarding declining the expenses so that better strategy for deriving the completive edge
can be done.
The processes which is required to be executed in respect to meet the better
organizational approach to have concise & competitive ability to overcome the prevailing
condition. On the basis of this, it can be mentioned that the organization is required to eliminate
the liabilities in turn attaining the reliable level of performance to get effective results. This
permits the firm to get he reliable ability to meet the better competitiveness in organizational
growth can be derived. The one of the significant aspects which is required to be taken into the
practice so that effectual performance can be attained to have success in the industry. The main
reason behind this is to have significant liquidity and financial approach that can lead
organization to meet such working scenarios that can uplift its position in sector. On the basis
of this it can be articulated that it is important for the firm to incline its efficiency of operational
practices by ensuring that relevant approach of growth among employees can be developed.
This can lead the firm towards meeting organizational targets in respect to have effective
performance. For maintaining good inventory turnover it should apply the actions like having
inventory management system which can lead the firm towards success. The main reason behind
this process is to ensure that good growth by meeting the market forces can be done. It can be
effectively executed by achieving the long term success through selling of those assets which
are outdated in turn attaining better approach of growth for development can be derived.
For improving the credibility position of the firm it becomes essential for the enterprise
to give emphasis on developing such actions which can permit meeting better organizational
growth & development (Novitasari and et.al., 2021). Formulating clear terms and condition can
help in receiving better liquidity performance in organization through having enough cash so that
reliable current & quick ratio can be obtained. This can contribute in building better image in
market so that improving its overall sales can assist in deriving the good organizational
performance. It is important for the firm to derive such competitive ability in turn meeting the
business requirements like having goo liquidity, profitability and better efficiency in order to
decrease the competition in market can become possible to have higher organizational
competitiveness in sector in market can be attained. Using the management accounting systems
can permit to derive such better level of performance which can uplift its overall
competitiveness. The other procedure which is needed to be implemented is having precise
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market analysis in turn deriving the objective of overcoming hurdles through taking relevant
steps can be done.
CONCLUSION
From the above report it can be concluded that financial management is related with
having the better success so that meeting appropriate approach for growth & development by
managing resources in accurate manner. The current study has involved its importance such as
ensuring proper planning, strategic decision-making, etc. the utilization of rations in financial
management has been attained. The man financial statements are cash flow, balance sheet, etc. so
that reliable ability to gain the information to meet objectives can become possible. This has
involved the ratio calculation and processes for improvement can be get.
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REFERENCES
Books and Journals
Al Muhairi, M. and Nobanee, H., 2019. Sustainable financial management. Available at SSRN
3472417.
Brigham, E.F. and Houston, J.F., 2021. Fundamentals of financial management. Cengage
Learning.
Fridson, M.S. and Alvarez, F., 2022. Financial statement analysis: a practitioner's guide. John
Wiley & Sons.
Novitasari, D. and et.al., 2021. The Effect of Financial Literacy, Parents’ Social Economic and
Student Lifestyle on Students Personal Financial Management. Economic Education
Analysis Journal.10(3). pp.522-531.
Prihartono, M.R.D. and Asandimitra, N., 2018. Analysis factors influencing financial
management behaviour. International Journal of Academic Research in Business and
Social Sciences. 8(8). pp.308-326.
Rao, P.M., 2021. Financial statement analysis and reporting. PHI Learning Pvt. Ltd..
Shim, J.K., 2022. Financial management. Professor of Finance and Accounting Queens College
City University of New York.
Welc, J., 2022. Financial statement analysis. In Evaluating Corporate Financial
Performance (pp. 131-212). Palgrave Macmillan, Cham.
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APPENDIX
Income statement
2016
Particulars Amount Amount
Turnover 189711
Less cost of sales:
Material Cost 42597
Production Cost 15231
Labour Cost 50758 108586
Gross profit 81125 GP % = 42.76%
Less Expenses:
Administrative expenses 13751
Other operating overheads 22374
Interest 1943
Total Overheads 38068
Profit/(loss) for the financial year 43057 NP %= 22.70%
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