Importance of Financial Management in Business Organizations

This report discusses the concept and importance of financial management in business organizations, financial statements, and the use of ratios in financial management. It also provides insights into improving financial performance with examples from case studies. The course code is BMP3005, the subject is Business Management with Foundation, and the course is Applied Business Finance.

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
1

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)
6
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
2

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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net profit or loss for the year end. Profit and loss account basically shows the
results from operations of the organizations.
Balance Sheet :
Balance sheet is an important part of the financial statements which shows
the assets, liabilities and capital of the Organizations. It provides the glimpse of
the company's finances (i.e. what it owns or owes). In other words, it portrays
value of economic resources controlled by the organizations and depicts the
liquidity and solvency of the organizations (Javed and Husain, 2021). It shows equity
and capital, non current liabilities and current liabilities under liabilities and under
assets it shows non current assets (tangible assets and intangible assets) and
current assets.
Ratios :
Ratios are the mathematical expressions of the 'relationship between two
accounting figures' which help in depicting the analysis of the financial trends of
the organizations over the period of time. There are four types of ratios that are
used in analyzing the financial statements, are as follows:
Liquidity ratios- It also known as short term solvency ratio. It evaluates the current
assets and current liabilities of the company. It determines the company have
enough assets to pay its short term debt. If company have not sufficient fund then
it affects the performance of the company. In the enterprise should not more
liquidity because it impacts the organization objectives. The ratio is further divided
into the sub parts:
1. Current Ratio- It is the best ratio to determine the short term liquidity. It
evaluates the company have enough stock, trade receivables and cash to pay
its bank overdraft, short term debt and creditors. An ideal current ratio is
always 2:1. the ideal ratio depends on the nature of business and
characteristics of its current assets and liabilities. Current ratio is equal to
current assets divided by current liabilities (Kalinowska, 2022).
2. Quick Ratio- Sometime it is called as acid test ratio. It is a much more
conservative measure to evaluate the short term liquidity as compare to
current ratio. It can be describe as Current assets less stock and prepaid
expenses divided by current liabilities.
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Solvency ratio- it is also known as leverage ratio. It compares the company debt's
with its assets, equity, profit and other. It determines the company have sufficient
fund and profit to pay its debt and interest. It includes the following ratios:
1. Debt equity ratio- It creates the proportion between debt and equity. If debt
equity ratio is higher, it means less safety for creditors and if it is lower it
means high protection of the creditors. It is used to making capital structure
decision. It can be calculated as Debt divided by equity.
2. Interest coverage ratio- It creates the relationship between interest and
preference dividend and determine what sources are available to pay the
claim (Manikas, Kroes and Foster, 2021).
Profitability ratios- It evaluates the company profit from its operations.
1. Gross profit ratio- It creates the relationship between profit and sale price. If
GP ratio is positive it is good sign for management. It evaluates the % of each
revenue in rupees after remaining payment of cost of goods sold.
2. Net profit- it measures the sales and net profit of the company. It is calculated
on the based of Profit earned after interest and tax and divided by revenue.
Efficiency Ratio: It is also known as performance and turnover ratio. It basically
measures the effectiveness with which the organization manages its assets. It
creates the relationship between the sales ans assets.
1. Stock Turnover Ratio: It measures the Cost of good sold and average
inventory. It evaluates that how fast and efficiently stock is sold. A high ratio is
good in point of liquidity.
2. Debtor's Turnover Ratio: If goods are sold and cash are not released then
receivable are created. It affects the liquidity position of the company. If it is
high it means the collection are rapidly.
3. Payable Turnover ratio: It creates the relationship between creditors and
purchases. It evaluates how fast a company to pay its trade payables (Park,
Kim and Chen, 2022).
Section 3: Using the template provided:
v. Completing the Information on the ‘Business Review
Template (Ensure that you display your calculations for this
detail)
6

7

vi. Using Excel producing an Income Statement for the Sample
Organisation (see Case Study)
8

vii. Using Excel completing the Balance Sheet
9

viii. Using the Case study information describing the
profitability, liquidity and efficiency of the company based on the
results of ratio analysis
From the above information, it can be said that the performance of the
company is better than in compare to year 2015. If company compares its
performance of sample enterprise, it is bad for the company because company can
not conduct its activities in efficiently in compare to sample organization. The
company should adopt the tools and technology that are produced the product at
minimum costs (Simbolon and Siagian, 2022). The company have sufficient assets to
pay its liabilities. If the company wants to survive till long term then company should
reduced its debtors collection period and increased the creditors period. The
company receives the collection at timely then company can purchase the additional
material.
Section 4: Using examples from the case study describing
and discussing the processes this business might use to
improve their financial performance.
If the company wants to expand its business, they should finance the money through
bank and other financial institution. They should sell their product at the domestic market
as well as national level and expansion their business activities. They should produced
the product at minimum cost and increased the profitability of the business. The company
should avoid all the wastage costs due to which the production costs are very high.
There are two technologies which helps to increased the efficiency level of an enterprise.
Budgeting- It is the technique of creating, imposing and working of price range. The
primary emphasis in budgeting procedure is the supply of assets to assist plans that are
being implemented. It is a method of coordinating the intelligence of a whole corporation
into a course of action based on beyond performance (Siriopoulos, 2021).
Risk management- in every organization suffers the risk. There are many types of risk
which are faced by an organization. They should adopted tools and reduces the risk
level. It evaluates the relationship among risks and the cascading effect they may have
on an enterprise strategic objectives.
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Conclusion
The above report concluded it, the financial management plays a virtual role
in the business organization. The financial manger takes the important decision in an
enterprise. It provides the sources at minimum cost of capital. It analyses the
financial position of an enterprise. With the help of financial statements company can
take important decision of the business organization. Further this report included the
financial ratios which determine the efficiency and profitability of the business.
11

References
Ahmad and et.al, 2022, May. The Importance Of Quantifying Financial Returns On
Information System (IS) Investment For Organizations: An Analysis. In 2022
International Conference on Machine Learning, Big Data, Cloud and Parallel
Computing (COM-IT-CON) (Vol. 1, pp. 197-200). IEEE.
Ahuja, D. and Pandit, D., 2021. A review and research agenda of fiscal policy post 2008
financial crisis. International Journal of Indian Culture and Business
Management, 24(2). pp.225-246.
Hoffmann, A.O. and Plotkina, D., 2021. Let your past define your future? How recalling
successful financial experiences can increase beliefs of self‐efficacy in financial
planning. Journal of Consumer Affairs, 55(3). pp.847-871.
Islam and et.al, 2021. Does foreign direct investment deepen the financial system in
Southeast Asian economies?. Journal of Multinational Financial Management, 61.
p.100682.
Javed, S. and Husain, U., 2021. Impact of Financial Factors on Social and Financial
Sustainability in Banking Sector: A Mediating Role of Financial Literacy. In Financial
Inclusion in Emerging Markets (pp. 257-280). Palgrave Macmillan, Singapore.
Kalinowska, U., 2022. Local taxes and fees and their importance for the municipal commune
on the example of the Pruszków commune in 2015-2020 (Doctoral dissertation, Zakład
Prawa Gospodarczego i Polityki Gospodarczej).
Manikas, A.S., Kroes, J.R. and Foster, B.P., 2021. Does the importance of environmental
issues within an industry affect the relationship between lean operations and corporate
financial performance?. Sustainable Production and Consumption, 27. pp.2112-2120.
Park, Y.J., Kim, Y. and Chen, G., 2022. Financial capacity and organizational stability in US
local governments. Public Management Review, 24(3). pp.418-441.
Simbolon, S.B.P. and Siagian, H.L., 2022. Analysis of Differences in Levels of Financial
Behavior towards Investment Preferences among Generation X and Generation Y in
Urban Areas. Budapest International Research and Critics Institute (BIRCI-Journal):
Humanities and Social Sciences, 5(1).
Siriopoulos, C., 2021. A first assessment of covid-19 pandemic in financial markets. Journal
of the International Academy for Case Studies, 27. pp.1-8.
Submitter and et.al, 2022. Students' Financial Literacy: Digital Financial Literacy
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Fairuz, Students' Financial Literacy: Digital Financial Literacy Perspective (March 31,
2022). Reference to this paper should be made as follows: Rahim, NM, pp.18-25.
Sun, M. and Wei, C., 2021, May. Construction of Small and Medium-sized Enterprises'
Financial Strategy System Based on Big Data in Low Carbon Economy. In 2021 2nd
International Conference on Computers, Information Processing and Advanced
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Appendix:
Income Statement
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