Importance of Financial Management for Business Growth

BSc (Hons) Business Management with
Foundation
BMP3005
Applied Business Finance
The concept and importance of financial
management and the processes
businesses might use to improve their
financial performance
Submitted by:
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Contents
Introduction p
0

Section 1: Definition and discussion of the concept and
importance of financial management p
Section 2: Description and discussion of the main
financial statements and explain the use of ratios in
financial management
p
Section 3: Using the template provided p-p
i. Completing the Information on the ‘Business Review Template
(Ensure that you display your calculations for this detail)
p
ii. Using Excel producing an Income Statement for the Sample
Organisation (see Case Study). This should be included within
your appendices p
iii. Using Excel completing the Balance Sheet p
iv. Using the Case study information describing the profitability,
liquidity and efficiency of the company based on the results of
ratio analysis p
Section 4: Using examples from the case study describing
and discussing the processes this business might use to
improve their financial performance p
Conclusion p
References
Appendix p
1

Introduction
Business finance is the considered as the backbone of any organization, profit
generation is the basic motive of any concern that is in the market. Finance is
needed for growth, expansion, daily operation and stabilization. Finance
management is really important failing to which can lead to bankruptcy or in-
debtness of the company. Proper finance management is possible though planning,
controlling and monitoring (Afroz, 2020). In this report on fiscal managing, meaning
and importance of financial management is to be briefly discussed. Methods through
which finance can be managed and maintained in order to sustain in the business
environment. Also importance for maintenance of various finance statement is
discussed. Ratio analysis is a method of analysis that is used for finding out the
position of company.
Section 1: Definition and discussion of the concept and
importance of financial management
Financial management as the term suggest is the managerial activity performed by
the internal team of the organization. This is really important part of business activity
as it involves planning, organizing, monitoring and controlling. The main objective of
financial management is to ensure that the firm never run out of finance there is
enough fund available to meet the needs of the organization and timely payment of
the obligation of business entity. To make sure that shareholder get enough fund as
part of their investment. Fuller utilization of resources can be ensured if there are
right resources available at the right time (Budzinski, 2018) . Hence, financial
management through various tactics ensures that optimum utilization of time and
resources takes place. It is genuine responsibility of the mangers to ensure that the
investment in which company is investing is profit making. There are various reasons
why such process is necessary it is due to the objective of organization it fulfills.
Financial planning is the main element of the concept. Planning helps in figuring out
risk involved in operation and makes are of it so that no potential loss occurs to the
firm. It also helps in financing decision about sourcing funding from which source. It
suggests the best source of allocating fund, so that more profit is generated to the
organization. There is huge impact that financial management can bring in an
organization.
 Safeguarding funds- in order to achieve the business goal finance, need to be
safely and smartly used. This concept helps in efficient use of assets so that
overspending does not happen. An efficient use of finance can bring growth to
the business.
 Allocation of fund- With the help of financial management decision regarding
where the fund should be spending. Allocation is the function of finance
management which can control the expense and generate more profit.
 Investment opportunity- wealth management is directly linked to investing,
opportunities will aid in wealth creation. Investment in different project can
make the brand strong, survival in competitive world and successful.
Tax planning- taxes are obligation of the organization to pay to the government, if the
incomes re not shown properly it can lead to incorrect tax calculation, also there are
various way the tax need to be planned so that liability minimizes. Financial
management also play major role in this regard (Hapsoro, and Santoso, 2018)
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Section 2: Description and discussion of the main
financial statements and explain the use of ratios in
financial management
Financial statements are the accounts prepared by the business entity to record its
business transaction. These recording are successful in tracking down the profit and
loss, assessing the assets and liabilities with the company. Financial statements are
used for various other purposes such tax, strategic planning making budgets and so
on. Cash inflows and outflows are tracked down with help of these records only.
Preparation of financial management is mandatory required by law (Jorge, de Jesus,
and Nogueira, 2019). These are by stakeholder of the company to know about the
situation of the company. Profit distribution, tax planning, preparation of budget,
profit maximization, strategic decision making and other finance related activities are
possible through these financial statements. The user of financial statements are
investors, market analysts and creditors to analyses the financial health of the
organization.
There are three major financial statement:
Balance sheet: This statement includes overview of the firm’s assets, liabilities,
shareholder investment and other important information. Balances sheet is the
summary of all the activities that occurred during the year. Balance sheet is prepared
on the end date of financial year. When an evaluating about the company’s
competency and other information balance sheet acquires all the vital needful that
anyone require. Balance is divided three important parts which have sub parts they
are equity, liability and assets. In equity part it contains details about the profit,
capital invested, shareholders, funds, shares issued by the company and reserves
with the company. Liability have information related to the loans, obligation that is
taken by the organization. Assets have data related to the possession that is
acquired with the company, the amount which is going to be part of the company’s
wealth. Liabilities and assets are divided in to two part short and long term. An item
which is to be held by company for more than 1 year (Klapper and Lusardi, 2020).
Income statement: as the name suggest this statement includes information
regarding the income and expenses of the organization occurred during the period.
The income statement gives an over look of income, expenditure, net profit and
earning per share. This statements are prepared on accrual and cash basis.
Cash flow statement: It is a statement which includes all the cash related
transaction and activities. From this statement the organization get know about the
inflows and out flows of the cash during a specified period. It is divided in three parts
of activities, operating which is linked with the daily operations cash inflow and
outflow. Investing activities are those which is concerned with firm’s investments
bought and sold. Financing activity is about the way the organization finances,
issuing equity shares, taking loan, payment of those loans etc.
Financial ratios- it is the evaluation of the items present in the financial statements
of the company. These ratios are used for determining the position of the company.
There are basically four type of ratios profitability, gearing, liquidity, active ratio and
leveraging ratio. Some of the ratio are explained below:
For judging the stability of the company most basic ratio is current ratio (Nindito,
2018).
Current ratio is used to measure whether the firm has enough current assets to
meet its current short term obligations. There are 3 different t scenario in this case:
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