Concepts and Importance of Financial Management for Business Finance BMP3005

This report discusses the concept and importance of financial management along with the main financial statement components. It also covers the uses of ratios in financial management and analyses the performance of the company using the calculations done in Business Review template and excel sheet. Lastly, the report recommends the process and strategies with the help of which company can improve their financial performance.

APPLIED BUSINESS
FINANCE BMP3005

Table of Contents
INTRODUCTION...........................................................................................................................1
SECTION 1......................................................................................................................................1
SECTION 2......................................................................................................................................2
SECTION 3......................................................................................................................................4
i)...................................................................................................................................................4
ii)..................................................................................................................................................5
iii).................................................................................................................................................5
iv).................................................................................................................................................5
SECTION 4......................................................................................................................................6
CONCLUSION................................................................................................................................7
SECTION 5......................................................................................................................................8
REFERENCES................................................................................................................................8
APPENDIX......................................................................................................................................9

INTRODUCTION
Business Finance means the funds and credit which is acquired and employed in the
business for their day to day use and also for expansion. The report will discuss the concept and
importance of financial management along with the main financial statement components.
Further, the report will also cover the uses of ratios in financial management. Moreover, the
report will also analyse the performance of the company using the calculations done in Business
Review template and excel sheet. Lastly, the report will recommend the process and strategies
with the help of which company can improve their financial performance.
SECTION 1
Concept of financial management
Financial management (FM) means the process of planning, organizing, directing and
controlling of the financial activities for the purpose of three main financial decisions such as
financing, investing and dividend decisions. The financial decision means the decision regarding
the selection of various sources of funds which the company need to acquire at low cost of
acquisition (Königstorfer and Thalmann, 2020). Basically, this include activities of procurement
of funds. Investment decisions, on the other hand means capital budgeting which includes
investment in fixed assets decision. It also includes the decision regarding investment in current
assets. The dividend decision involve the decision regarding whether to distribute the earnings to
shareholder or to retain it for future development of business.
Importance of Financial Management
The various importance of financial management to the company which help them to
achieve their goals and objectives are as follows:
 Financial Planning: It helps in determining the requirement of the finance within the
business with the help of which daily operation of business takes place (Smith, Smith and
Bliss, 2020).
 Acquisition of funds: It is also important for acquiring the funds from the various sources
such as equity, debts, bonds etc. which must be minimum cost.
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 Proper utilization of funds: The company also use the financial management techniques
such as capital budgeting to use and invest the acquired funds in projects to earn higher
returns.
 Improve Profitability: The profitability of the company basically depends upon the
financial strategy (Al-Kabi and Jirjees, 2019). The FM tools and techniques helps the
company to improve the profit with strong financial controls such as budgetary controls,
ratio analysis, cost volume profit analysis.
 Increase the value of firm: It is also crucial for increasing the wealth of the investors and
the value of the business via achieving maximum profit and maintaining the retained
earnings.
SECTION 2
Financial Statement Components
The main financial components which need to be prepare by every company in order to
show its true and fair view are as follows:
 Income Statement: This is a statement which shows the various income and expenses
sources. The income minus expenses state the profit or loss in which if the income is higher
than expenses then it is profit while if income is lower than expenses then it is loss for the
company (Schoenmaker and Schramade, 2018). This income and expenses are includes all
income and expense which are or are not attributable in the ordinary course of business.
 Balance Sheet: The balance sheet is a statement which represent the assets and liabilities of
the company which is accessible to user of financial statements for decision making.
Normally, the financial statement represent the data on the last date of financial year where
assets need to equal liabilities. It is also known as the statement of financial position which
is also analyse by the auditor to give fair opinion. The assets and liabilities are further
divided into the current and non-current assets based on its period. It is best for the
comparison between more than one company.
 Cash Flow Statement: This is a components of financial statement which represent the cash
inflow and outflow sources from the three main activities of business. This three activities
are operating, financing and investing. The cash inflow sources are cash sales, sale of assets,
issuance of shares etc. while the cash outflow sources are cash payments, purchase of assets,
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redemption of debts etc. It evaluate the ability of the company to generate the future net cash
flow with the help of which they can expand their business to next level. It also helps in
identifying the needs of external financing.
 Statement of Change in Equity: The change in equity take place over the period of time
because of the net profit of current years, issuance of equity, buyback of shares, increase or
decrease in retained earnings etc. This helps the company and other stakeholder to identify
the equity changes as it directly affects the earning per share of the company. It basically
helps the investors to known whether the outstanding shares are increasing or decreasing
along with the reasons (Denoncourt, 2018). As, on this basis they can make decisions
regarding investment in such company is profitable for them or not. Not only that, this
statement also gives the information about the earning which are retained for future business
development.
Uses of Financial Ratios:
The ratio calculation is basically one of the easiest tasks and generally uses by the
stakeholders for comparison and decision-making. The various uses of ratios are as follows:
 It is uses for analyzing the performance trends of the company over the various period of the
time.
 Along with analyzing own performance, this is also useful for comparing own performance
with that of the competitors.
 On the basis of analysis and comparison company and various stakeholders such as
investors, creditors make their decision based on their interest within company.
 For example, investors uses financial ratios for their investment decision while creditors
uses this to make decision whether to provide goods on credit or not.
 The analysis and comparison is done on the basis of profitability, liquidity, gearing and
efficiency which basically cover every aspect of business (Ayyagari, Demirgüç-Kunt and
Maksimovic, 2017).
 Not only that, it is also uses to identify the relation between the various items present in the
financial statement of the company.
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Beside various advantages of uses of financial ratios, it also cause and provide weakest area to
the company. That’s why it is advisable to the stakeholders to use this very carefully at the time
of operations as many time companies are different in operations.
SECTION 3
i)
The Net Profit for the year 2016 , is £? (2015: £18,987,000).
The Company’s key financial and other performance indicators during the year were as follows:
2016
£’000
2015
£’000
Change
%
Profit for the financial year 43,057 18,987 +127 %
Shareholder’s equity 83,802.7 63,057 +32.9%
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 years contribution in
2016.
Gross Profit = £81,125?
Net Profit = £43,057
Net Profit increased in 2016 by +127% during the year.
Shareholders’ equity increased by 32.9% by £20,745.
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
4

ii)
Income statement covered in Appendix section.
iii)
Covered in attached excel sheet or template.
iv)
Interpretation of Ratio based on the Calculations
 Profitability Ratio: The net profit of the company in the year 2015 is 18987 while in the
next year I.e., 2017 is 43057 which indicates +127% change. This positive change in the
profit is because of the increase in the turnover of the company I.e., +5.6% from the
previous year (Cowling and et.al., 2018). The net profit of the company basically states their
ability to generate the profit relative to its revenue over the period of time. In order to
maintains the upward trend in this ratio, the company have to make sure that they are using
value-based pricing strategy and their cost of manufacturing the products are declining.
 Liquidity Ratio: This is also one of the financial matrix with the help of which the company
can identify their ability to pay off current obligation with the use of cash generated from
current assets. The current ratio of the company in the year 2016 is 2.22 and its quick ratio is
1.47 which is higher than the ideal ratio of 2 and 1 respectively. In order to maintain this
trend and standard, the company need to make sure that the trade receivables are paying the
amount on time. For this, they can offer early payment discount to their credit customers.
 Efficiency Ratio: The efficiency ratio of the company describes the ability of the company
to pay its creditors on time and receive payment from debtors on time. In simple term, it
helps in identifying and analyse the capability of the company to manage the operating cycle
and working capital. The positive and high current and quick ratio then standard indicate that
company efficiency and working capital management is perfect. In order to further maintain
it, the company need to provide payment to creditors on time because then only they supply
raw material to the company on time (Khattak, 2020). The whole process are interlinked
with each other.
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SECTION 4
Recommendation on ways to improve business performance
The various strategies and ways recommenced to the companies which help them to
improve their business performance are as follows:
 The performance of an business can easily be improved via adoption and application of
Customer Relationship Management (CRM) tools. It is because this is one of the best
strategy to find out the new customers base along with their needs and preferences. The
company can search the details and buying patters along with the purchase histories in order
to connect with them (Igoni, Onwumere and Ogiri, 2020).
 Another ways which is advisable to the company to adopt in order to improve business
performance is marketing mix. It is because this helps the company to know their products
and services loop holes along with the in trend marketing strategies. If the company can
promote their products via online and serve to the customers via online then they can easily
improve their sales and market shares. The company can also improves the quality of their
products and services via spending time and money on planning and organizing.
 Not only that, their is also one strategy which is known as financing and capital structuring
strategy which can help the company to acquire and utilize the funds in best manner
possible. The company that wants to expand their business in the national as well as
international market can adopt this strategy (Bellavitis and et.al., 2017). This will also help
in reducing the cost of sales of the company via investing money on best and low cost
equipment and assets purchase. Acquiring funds at low cost and investing them at higher
returns is one of the best way to improve the performance and productivity of the company.
 Besides all the above ways, the one strategy which can helps the company to increase their
products and services production with quality maintenance is increasing employees
productivity. It is because the employees are the one that work for the benefits of the
company. For this implementation of CRM software is best as with this the management of
the organization can look out the productivity of the employees and also effectively
communicate with them. The company can also use 360 degree feedback strategy to
understand the issues and requirement of the employees. The company make sure that each
and every employees are satisfied and they are achieving their personal and professional
goals.
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CONCLUSION
The report has concludes the various concepts and aspects of financial management along
with its importance. The report has also concludes the components of financial management and
uses of financial ratios. Further, the report has computed the ratios, income statement and
balance sheet of the given case study. On the basis of calculation, the report has also concluded
the performance of the company based on liquidity, profitability and efficiency. Lastly, the report
has provides the various ways and strategies which help in improving the performance of the
business.
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SECTION 5
REFERENCES
Books and journals
Königstorfer, F. and Thalmann, S., 2020. Applications of Artificial Intelligence in commercial
banks–A research agenda for behavioral finance. Journal of behavioral and experimental
finance. 27. p.100352.
Al-Kabi, M. N. and Jirjees, J. M., 2019. Survey of Big Data applications: health, education,
business & finance, and security & privacy. Journal of Information Studies &
Technology (JIS&T), 2018(2), p.12.
Smith, J. K., Smith, R. L. and Bliss, R. T., 2020. Entrepreneurial finance. Stanford University
Press.
Schoenmaker, D. and Schramade, W., 2018. Principles of sustainable finance. Oxford University
Press.
Denoncourt, J., 2018. Intellectual property, finance and corporate governance. Routledge.
Ayyagari, M., Demirgüç-Kunt, A. and Maksimovic, V., 2017. SME finance. Available at SSRN
3070705.
Cowling, M. and et.al., 2018. Loan guarantee schemes in the UK: the natural experiment of the
enterprise finance guarantee and the 5 year rule. Applied Economics. 50(20). pp.2210-
2218.
Khattak, M. S., 2020. Does access to domestic finance and international finance contribute to
sustainable development goals? Implications for policymakers. Journal of Public Affairs.
20(2). p.e2024.
Igoni, S., Onwumere, J. U. J. and Ogiri, I. H., 2020. The Nigerian digital finance environment
and its economic growth: Pain or gain. Asian Journal of Economics, Finance and
Management, pp.1-10.
Bellavitis, C. and et.al., 2017. Entrepreneurial finance: new frontiers of research and practice:
Editorial for the special issue Embracing entrepreneurial funding innovations.
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APPENDIX
Income statement for the year ended
31st December 2016
201
6
Turnover 3
1897
11
Less cost of sales:
Material Cost
425
97
Production Cost
152
31
Labour Cost
507
58
1085
86
Gross profit
8112
5
GP
% =
42
.8
Less Expenses:
Administrative expenses
137
51
9

Other operating overheads
223
74
Interest
194
3
Total Overheads 4
3806
8
Profit/(loss) for the financial year
4305
7
NP
%=
22
.7
10