Importance of Financial Management in Business Organizations

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
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Contents
Introduction 3
Section 1: Definition and discussion of the concept and
importance of financial management 3
Section 2: Description and discussion of the main
financial statements and explain the use of ratios in
financial management 4
Section 3: Using the template provided 6-10
i. Completing the Information on the ‘Business Review
Template (Ensure that you display your calculations for this
detail)
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ii. Using Excel producing an Income Statement for the Sample
Organisation (see Case Study). This should be included within
your appendices 8
iii. Using Excel completing the Balance Sheet 9
iv. Using the Case study information describing the profitability,
liquidity and efficiency of the company based on the results of
ratio analysis 10
Section 4: Using examples from the case study describing
and discussing the processes this business might use to
improve their financial performance 10
Conclusion 11
References 12
Appendix 13
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Introduction
Finance management is very important concept in the business organization.
In every enterprise money are required. Cash are used in business in various forms
such as to acquire of fixed assets, raw material purchase and operate day to day
activities. Cash are required in every organization to fulfill day to day activities.
Business finance is very important to the commercial purpose. The owner of the
organization may finance of different places such as banks, government grants and
crowdfunding. It is the lifeblood of the organization (Ahmad and et.al, 2022). This
report includes the concept and importance of finance management and preparation
of balance sheet and profit and loss account of an organization. Further this report,
calculate the financial ratios to determine the financial performance of the company.
Section 1: Definition and discussion of the concept and
importance of financial management
It is social control activity that is obsessed with the designing and controlling
of the enterprise's financial resources. It consist of prediction, designing, organizing,
leading, subordinating and controlling of all activities associate to acquiring and
utilization of the commercial enterprise resources of an undertaking in keeping with
its financial objective. It is concerned with the managerial decisions that result in the
acquisition and financing of short term and long term credits for the firm. It is also
called as management of finance. It controls all the business activities of an
enterprise. Each activity of an enterprise is contemplated in its financial statements.
Economic control deals with activities that have financial implications. The important
goal of these management is to improve the financial condition of the share owner
with the aid of maximizing the value of the company. This basic objective of
Economic management is reflected the fair price of the share. The prior objective of
financial management is replaced by wealth maximization. It manages the funds to
the enterprise. It focuses on the positive cash flow rather than book profit. It
manages the economic resources with efficiently and effectively. It is concerned with
procurement and usage of funds (Ahuja and Pandit, 2021). The primary objectives of
financial management are as follow:
1. Profit maximization- The most important objective of financial management is
profit maximization because it works as a efficiency and reduces the risk of an
enterprise. When main objective of the business is profit earning the ultimate
aim would be profit maximization. The business future is uncertain. An
organization should generate more profit so that they fulfill the needs of the
business. It focuses on the consumers and employees. It does not consider
those factors that are associated with profit. The word of the profit are used
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different types in each enterprise. It is wider concept at the cost of cultural and
motive obligations.
2. Wealth maximization- It is the appropriate goal of an organization. When the
organization increases the shareholder's wealth, the each shareholder may
use this wealth to increase his individual performance.
There are two important concepts which are needed to explain in financial
management, they are as follow:
Procurement of funds- It may be raised through different sources. It is critical term in
the business. There are various sources through which company can obtain the
money such as debenture, equity share and loans. In the changing environment, the
organization is not financed through with the available sources but they also depend
other sources of finance such as venture capital. The manger of the company
chooses the best sources which are support of the dynamic environment.
Utilization of funds- The responsibility of finance manger to mange the utilization of
funds. It evaluates the rate of interest and risk factors of every source of finance and
adopt those source which available at lower interest rate. If the business is not
conducting in proper manner, it means sources are not used in the proper manner.
The importance of financial control can't be over-emphasized. It is the
critical term inside the businesses. If the enterprise does no conduct proper activities
then commercial enterprise can not live till long time. There are a few motives that
monetary control is essential within the enterprise (Hoffmann and Plotkina, 2021).
 It controls the financial activity.
 It increased the overall performance of the company.
 It safes the assets to achieve the organization objectives.
 It improves the production efficiency level in the organization.
Section 2: Description and discussion of the main
financial statements and explain the use of ratios in
financial management
Financial Statements :
Financial statement is a structured representation of historical financial
information of the Organizations which conveys the business activity and financial
performance of the Organizations. Financial statement includes Profit and loss
accounts, Balance sheet, Cash Flow Statements and any explanatory notes to
accounts. Objective of financial statements is to provide the accurate information
about the financial position, performance and cash flows of an organization that is
useful to the users of the financial statements (Islam and et.al, 2021).
Profit and Loss Accounts :
Profit and loss account, also known as income statement, shows the
incomes and expenditures of the Organizations at the end of the financial year. It
is prepared considering the balances of the accounts in trial balance and it shows
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