Importance of Financial Management for Business Growth

This report discusses the concept and importance of financial management, financial statements, and ratio analysis for improving financial performance of a business. It also provides insights on processes that businesses can use to improve their financial performance. The report includes a case study and analysis of the company's financial performance, along with suggestions for growth and development.

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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 If the Current Assets is more than Current Liabilities, then Ratio is greater
than 1.0 -> it’s a good situation for a company, company has good financial to
meets any upcoming liabilities.
 If Current Assets is equal to Current Liabilities, then Ratio is equal to 1.0 ->
Current Assets are just adequate enough to pay down the current liabilities.
 If Current Assets is less Current Liabilities, then Ratio is less than 1.0 -> a
problem situation for the company where they don't have enough resources to
pay of its short term liabilities
Earnings per share ratio: Earnings per share (EPS) is the company's net profit
divided by the no. of common shares that is outstanding. It indicates that how much
money the company makes for every share of its stock.
Return on capital employed
The return on capital employed is about how much does the operating income is
generated against each euro of capital employed. A higher ROCE is always better
and preferred, as it show that more profits are generated per euro of capital
employed
Debt to equity ratio
This ratio shows how much debt is there over ever $1.00 of equity. A ratio of 0.5 or
lesser means that on every $0.50 of debt is every $1.00 in equity. A ratio above 1.0
shows more debt than equity (Orazalin, and Mahmood, 2018).
Debtors Collection Period
A debtor collection period is the sum of time it takes to collect loans and debts.
Smaller the time is, shows time taken to collect the debts and this reflects efficiency
of the company. A longer period reflects problematic trade debtors, bad debts and
less overall efficiency. So, a lower debtor collection period is better and positive than
a high debtor collection period as it means that a company is collecting payment at a
faster rate
Section 3: Using the template provided:
v. Completing the Information on the ‘Business Review Template
(Ensure that you display your calculations for this detail)
2016
£’000
2015
£’000
Change
%
Turnover (continuing operations) 189,711 179,587 +5.6%
Profit for the financial year 43057 18,987 +126.7
Shareholder’s equity 83815 63,057 +32.9%
Current assets as % of current liabilities 222% 304% -82%
Customer satisfaction 4.5 4.1 +10%
Average number of employees 649 618 5.00%
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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 = £40%
Net Profit = £20%
Net Profit increased in 2016 by 126.7% 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%
Notes to the financial statements
at 31 December 2016
3. Turnover
Turnover recognized in the income statement is analyzed as follows.
2016 2015
£000 £000
Sale of goods 189,711 179,587
Turnover from continuing operations 189,711 179,587
4. Cost of Sales
2016 2015
£000 £000
Material Cost 42,597 38.845
Production Cost 15,231 12,845
Lab our Cost 50,758 47,285
Cost of Sales 108,586 98,975
5. Overheads
2016 2015
£000 £000
Administrative Expenses 13,751 20,251
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Other Operating Costs 22,374 34,293
Interest 1,943 7,081
Total Overheads 38,068 61,625
vi. Using Excel producing an Income Statement for the Sample
Organisation (see Case Study)
vii. Using Excel completing the Balance Sheet
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viii. Using the Case study information describing the profitability,
liquidity and efficiency of the company based on the results of
ratio analysis
In the above case discussed, comparison between the year 2016 and 2020 is being
made. In the year 2016 company has overall improved in term of average
employees, as it has raised (Shinta, and Lestari, 2019). Net profit increased by 126.7%
and also shareholder equity increased. The company should focus on cost cutting,
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and control expenses. The marketing schemes should be applied in order to improve
the sales revenue. From the ratio analysis of the organization that company is stable
position and ready for expansion. This stable condition of the business entity can
help the administration to grow further and be more strong brand in the market.
Section 4: Using examples from the case study describing
and discussing the processes this business might use to
improve their financial performance.
A company start its operation in the market to thrive stability and growth .m the
current association is stable position and can expand its business. For growth and
development business entity needs funds (Shivaraj and Gokula, 2020). The source of
finance selection can be typical choice and may require various analysis. Below are
provided with techniques that can aid the business growth:
Management information system: It is information system uses process, people, data and
technology to provide best solution to the company. It is most effective system that uses
technology to bring fuller utilization in the process. It is an ideal solution for managing the
huge enterprise operations effectively. It uses data mining technique for achieving higher
customer satisfaction and gain competitive advantage.
Risk management- when an organization function and operate in the business
environment there is also risk involved that could cause harm to their business, in
order to control the effects of the risk its pre analysis is necessary. Risk management
is one of the too, which is used to save the organization from future occurring loses
(Welc, 2022).
Conclusion
In the above report it was disused that financial management play very important
role in business functioning. Management of funds, obligations and investment is
main function the concept performs. Fuller utilization through allocating funds from
the best source. Financial statements are accounts reflecting the business activity
that took place during specific time. Main financial statements are balance sheet,
profit and loss account and cash flow statement. These reports are used for
business decision, increasing efficiency, optimum utilization of resources. The
profitability of the company can be judged using profitability ratio and overall analysis
can be done effectively using these financial ratios.
References
Afroz, F., 2020. Financial Statement Analysis of Listed Private Conventional Banks of
Bangladesh.
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Budzinski, O., 2018. Financial regulation as an anticompetitive institution. In The Palgrave
handbook on the economics of manipulation in sport (pp. 159-179). Palgrave
Macmillan, Cham.
Hapsoro, D. and Santoso, T.R., 2018. Does audit quality mediate the effect of auditor tenure,
abnormal audit fee and auditor's reputation on giving going concern
opinion?. International Journal of Economics and Financial Issues, 8(1). p.143.
Jorge, S., de Jesus, M.A.J. and Nogueira, S.P., 2019. The use of budgetary and financial
information by politicians in parliament: a case study. Journal of Public Budgeting,
Accounting & Financial Management.
Klapper, L. and Lusardi, A., 2020. Financial literacy and financial resilience: Evidence from
around the world. Financial Management, 49(3). pp.589-614.
Nindito, M., 2018. Financial statement fraud: Perspective of the Pentagon Fraud model in
Indonesia. Academy of Accounting and Financial Studies Journal, 22(3), pp.1-9.
Orazalin, N. and Mahmood, M., 2018. Economic, environmental, and social performance
indicators of sustainability reporting: Evidence from the Russian oil and gas
industry. Energy policy, 121. pp.70-79.
Shinta, R.E. and Lestari, W., 2019. Pengaruh financial knowledge, lifestyle pattern pada
perilaku manajemen keuangan wanita karir dengan locus of control sebagai variabel
moderasi. Journal of Business and Banking, 8(2). pp.271-287.
Shivaraj, H.N. and Gokula, K.S., 2020. A Study on Financial Statement Analysis of Avant
Grade Hospitality Private Limited Bangalore.
Welc, J., 2022. Financial statement analysis. In Evaluating Corporate Financial
Performance (pp. 131-212). Palgrave Macmillan, Cham.
Appendix:
Income Statement
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