Importance of Financial Management in Business Finance

This article discusses the concept and importance of financial management in business finance. It covers financial planning, economic growth, and improving the standard of living. It also explains financial statements and the use of ratios in financial management. The article concludes with ways to improve financial performance.

Business Finance

Table of Contents
INTRODUCTION ..........................................................................................................................4
TASK...............................................................................................................................................4
Section 1 Discuss the concept and importance of financial management ..................................4
Section 2 Financial statements and use of ratios in financial management................................5
Section 3 Business review Template...........................................................................................7
1) Calculations............................................................................................................................7
Cover in appendices .............................................................................................................7
2) Income statement....................................................................................................................7
Cover in appendices..............................................................................................................7
3) Balance sheet..........................................................................................................................7
Cover in appendices .............................................................................................................7
4) By using the information discuss about the profitability, liquidity and efficiency of
company by using ratio analysis technique............................................................................7
Section 4 Ways for improving financial performance................................................................9
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................11
APPENDICES...............................................................................................................................12

INTRODUCTION
Business finance refers to managing the funds properly by finance department or top
level management for run the operational activities smoothly. This research is prepared on the
basis of secondary data which includes journals, newspapers, magazines and so on. In any
organization finance department played the major role to decide how much fund is required to
perform various functions of the organization effectively. Finance is very essential in any
organization to take right decision by top level management (Anisa and et. al., 2021). It leads to
increase the productivity of employees and company which is helpful to facilitate best quality
service to customers. In business finance maintaining records is essential for any organisation
which leads to decrease the wastages of expense. It also helped to increase the brand image of
the company between public. Because for increasing their popularity finance department release
funds to marketing department and then they use various strategies to attract the consumers.
TASK
Section 1 Discuss the concept and importance of financial management
Financial management refers to the function or area in company which is related to
expense, profitability, credit or cash and so on. The main role of financial management in
company is to manage the expense of the employees and whole organization systematically. The
other role of finance department is to distribute salaries to the employees in time. Decent salaries
helped to increase the loyalty of workers towards company for long time. The various scopes
which are considered by organization to run their activities are described below -
 Financial planning – In this step the finance department made overall plan and then they
decide in which amount organizational activities run smoothly. Finance management
department are also responsible for mange the expense of training which are provided by
management to the new and existing employees (Bedford and et. al., 2021). Because in
training lot of investment are made to develop the workers professionally which leads to
decrease the cost of the company.
 Economic growth and stability – Financial management also helped to increase the
economic growth of organization in the form of profit. For increasing the growth of
organization it is necessary for management that they must provide best quality product
to consumers. It leads to enhance the consumer loyalty towards company for a long time.

When economic stability and growth are increased then the wealth of company are easily
increased. Here wealth refers to the market share, good will or capital which is highly
essential for companies to run their operational activities and services in long run.
Basically organization economic growth depends various factors such as human
resources, physical capital, technology and so on.
 Improve standard of living – It is basically refers to the decent wages which was
provided by top level management to lower level employees. These salaries are very
essential to change the living standard of the employees and also for maintaining their
satisfaction level in their job for longer time (Broccardo and et. al., 2021). With the help
of various financial benefits employees are easily motivated and their work efficiency
easily increased in long run. It includes rewards, incentives, bonus and others.
Section 2 Financial statements and use of ratios in financial management.
The annual financial statements state that the financial report sets out the company's
financial activities and situation. It reflects financial health, an accomplishment that is useful in
decision making. These statements are used by government agencies, accountants, and
corporations to help ensure accuracy, tax funding, and investment purpose. It takes the form of a
written declaration. The account consists of three parts: the income statement, the balance sheet
and the cash flow statement.
 Income statement- It is an profit and loss statement that indicate the company's financial
statements by showing income and operating expenses for a period of time. It shows the
company's profitable position. This shows the time period used by an investors and
managers to know that the company made a profit or loss in a period. It is created by
comparing data from two to three years. The basic formula used in this equation is:
Income = Revenue - Expenses
 Balance sheet- It refers to the balance sheet of a person or a company's financial
condition. It affects the assets and liabilities. The differentiation among assets and
liabilities is accepted as the net assets or capital of the company. Accordant, to the
accounting equating, assets are equal to assets minus liabilities (Eti, 2021). The balance
sheet helps to see how the assets are financed with liabilities and capital reserves. The
assets are in the form of liquidity. Liabilities are reflected in the order payable by the
company. It works on the formula of:

Assets = Liabilities + Shareholders Equity
 Cash flow statement- It relates to changes in the balance sheet and earnings that affect
the financial resources. It defines the flow of money in and out of the company. It is used
to determine short-term profitability and solvency. The purpose of this statement, which
is used by investors to know how the company is running, and what are the sources of the
funds, the ways in which they are being spent. It is divided into the three areas of
operational activity, investment activity and financing activity.
◦ Operational activity- Operating activity are the sources and use of funds for the
conduct of business and the sale of products or services related to trade accounts
receivable, depreciation, inventory.
◦ Investment activity- Investing activity includes the company's sources and cash that
is used for long-term investments. It includes buying and selling of assets, loans, trade
accounts receivable, payments related to a corporate merger, purchase of fixed assets
(Khan and et. al., 2021).
◦ Financing activity- Financing activities involve sources of money from investors or
banks and cash payments to shareholders for running the business smoothly. It
involves issues of shares and debentures, payment of dividend and interest etc.
Use of ratios in financial management
The financial ratios is in use by the outside expert to determine the facet of the concern
that reflect the business profitability, liquidity and solvency. It relates to the analysis of financial
information based on the company's financial statements. The key figure analyses are used to
compare the company's financial performance. The financial metrics are obtained from
competitors for comparison, which help management to identify gaps and competitive
advantages. It improves the company's position decision (Lee 2021). Using the ratio also shows
the trend line of financial performance by collecting data from the financial statements and
determining future performance. It is also used to determine operational efficiencies in managing
assets and liabilities by reflecting over- or underutilization of resources. With the shareholder
loan quota available, they can use the payment system to get a picture of the company, but they
may still have used this information to provide additional spending for market growth or to limit
the flexibility to start repayment.

Section 3 Business review Template
1) Calculations
Cover in appendices
2) Income statement
Cover in appendices
3) Balance sheet
Cover in appendices
4) Discussing about company profitability, liquidity and efficiency by using ratio analysis
technique.
 Profitability ratio- This assists in determining the net income made by companies at the
last of a fiscal year. This income can be accompanying to investing, all-purpose business
activity, earnings from stocks, etc. In other words, it determines its ability to render
financial gain from its earnings.
From the graph above it has concluded that profitability of companies is increasing. The
company's gross profit has fallen by the minute in comparison to the preceding year. On the
other hand, the company's net profit was very small in 2015, but in 2016 there is a sharp increase
in that revenue. The reason for this increase is that the company has tightly controlled its indirect
spending. This means that the organization is taking serious steps to improve its profitability
index.
Year 2015 Year 2016
0
5
10
15
20
25
30
35
40
45
50
Gross profit
Net profit

 Liquidity ratio- These metrics help determine a company's ability to use current assets to
meet its short-term liabilities (Olan and et. al., 2021). This ratio is very useful for
creditors to determine whether and to what extent they should or should not provide
credit lines to the company.
The liquidity position of the company is good by seeing at present relation the company
is capable of paying its debts twice with short-term assets that is hold. Even if it is unable to
dispose of its stock, it will have adequate assets that can be used to pay off its ongoing debt.
After the payment, there is enough amount left for day-to-day operations.
 Efficiency Ratio- It measures a company's knowledge to create income from the assets it
holds. It also tracks the time it can turn its sales into real money (Özdemir and Selçuk,
2021).
Debtors Turnover Ratio Creditors turnover ratio
0
10
20
30
40
50
60
70
No. of days
Current Ratio Quick Ratio
0
0.5
1
1.5
2
2.5
Column 1

The interpretation can be that turnover rate of debtors and creditors works correctly in the
context. The company has adequate time period in between to make payments and collect money
which satisfy its creditors without pause. A company's inventory turnover rate cannot be
interpreted without comparing the data with another company or with previous results from one
company. It takes about 3 months to sell all of the inventory, which can be considered good.
Section 4 Ways for improving financial performance
Financial ratios are only useful if they are used to improve business performance. This
can be done by recognizing all expenses that do not add value to the company's profitability and
are unnecessary. The further sales can be increased by focusing on marketing techniques. The
company's finance department can also play an important role in rising the well-being of the
organization by revising its collections policy and recognizing the assets that are not worthy of
the business (Pradhan and et. al., 2021). The process for improving financial performance
includes several methods-
 Lowering expenses- Spending is reduced and there are cheap alternatives from suppliers,
equipment and services are find which helps in improving financial position. The
deferred payment are arranged for larger expenses to keep cash availability in
organisation (RASA, 2021).
 Recovering Outstanding payments- The unpaid bills have an impact on the company's
financial performance and cash flow. A collection policy can be used in which the
debtors are regularly reminded of obligations. When negotiating sales contracts, make
sure the terms are clear about when refunds are expected and what if they are late.
 Consolidate debt- It's important to research existing corporate debt while looking for
options to strengthen corporate finances. While having a lot of loans, it can make sense to
consolidate them. While agreeing to a new contract it is essential to consider different
options (Umar and et. al., 2021).
CONCLUSION
From the report above, it was concluded that financing is a business lifeline that
contributes to the company's growth and profitability. Although the elements used for
profitability are extracted from financial records, these analyses aid in metric research. Financial
position, which includes both expenses and income, is used to determine a company's

profitability. The key figure analysis improves the earnings positioning of the company through
support in the administration, in particular the business success, which leads to improved results
and thus to higher margins. To improve financial performance, the company should consider the
various external and internal factors. The balance sheet is drawn up once a year at the end of the
financial year and shows the company's assets. Annual financial statements help evaluate actual
costs, revenues, revenues, obligations and characteristics over the course of the fiscal year and
enable more informed decisions to improve competition.

REFERENCES
Books and Journals
Anisa, R and et. al., 2021. Potential of reducing crop insurance subsidy based on willingness to
pay and random forest analysis. In Mathematical and Statistical Methods for Actuarial
Sciences and Finance (pp. 27-32). Springer, Cham.
Bedford and et. al., 2021. The impact of IFRS 10 on consolidated financial reporting. Accounting
& Finance.
Broccardo and et. al., 2021. The quest for a sustainable social finance business model: is peer-to-
peer lending the legitimate heir to cooperative banking?. Journal of Sustainable
Finance & Investment, 11(2), pp.123-142.
Eti, S., 2021. The use of quantitative methods in investment decisions: a literature
review. Research Anthology on Personal Finance and Improving Financial Literacy,
pp.1-20.
Khan and et. al., 2021. Does oil prices cause financial liquidity crunch? Perspective from
geopolitical risk. Defence and Peace Economics, 32(3), pp.312-324.
Lee, J.W., 2021. Diffusion of innovations. In Encyclopedia of Sport Management (pp. 137-138).
Edward Elgar Publishing.
Olan and et. al., 2021. The role of Artificial Intelligence networks in sustainable supply chain
finance for food and drink industry. International Journal of Production Research,
pp.1-16.
Özdemir, M. and Selçuk, M., 2021. A bibliometric analysis of the International Journal of
Islamic and Middle Eastern Finance and Management. International Journal of Islamic
and Middle Eastern Finance and Management.
Pradhan and et. al., 2021. Innovation, Finance, and Economic Growth in OECD Countries: New
Insights from a Panel Causality Approach. International Journal of Innovation and
Technology Management, 18(04), p.2150013.
RASA, R., 2021. The Effects of Credit Risk on the Profitability of Commercial Banks in
Afghanistan. The Journal of Asian Finance, Economics and Business, 8(7), pp.477-489.
Umar and et. al., 2021. Direct and indirect effects of customer financial condition in the
acceptance of Islamic microfinance in a frontier market. Journal of Islamic Marketing.

APPENDICES
Business review Template

1) Income statement

2) Balance sheet