Importance of Financial Management: Concept, Statements, Ratios, and Improvement Processes

This report emphasizes the importance of financial management in planning, organizing, and controlling resources for meeting organizational objectives. It discusses the concept and significance of financial management, main financial statements, use of ratios, and processes to improve financial performance. It includes a business review template, income statement, balance sheet, and performance evaluation using profitability, liquidity, and efficiency ratios.

Importance of Financial
Management

TABLE OF CONTENT
INTRODUCTION...........................................................................................................................1
SECTION 1......................................................................................................................................1
Discussing the concept and importance of financial management..............................................1
SECTION 2......................................................................................................................................2
Discussing the main financial statements and explaining the use of ratios in financial
management.................................................................................................................................2
SECTION 3......................................................................................................................................3
i) Business review Template........................................................................................................3
ii) Income statement ....................................................................................................................4
iii) Balance sheet..........................................................................................................................4
SECTION 4......................................................................................................................................8
Explaining the processes to improve the financial performance................................................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................11
APPENDIX....................................................................................................................................12

INTRODUCTION
Financial management is concerned with taking decision of the organization that pay
attention on considering all the crucial aspects like investment, financing and dividend factors.
In the recent business environment it is largely important for organization to implement
effective financial management practices so that competitiveness scan be derived. The current
report will pay attention on defining the concept & significance of financial management. It will
emphasize on explaining main financial statements & use of ratios. Present study will
concentration on presenting income & financial statement and calculation of ratios as per the
requirement of case study. The current study will give focus on discussing the process of h
improving the financial performance.
SECTION 1
Discussing the concept and importance of financial management
Financial management is basically associated with planning, organizing, directing and
controlling the financial practices of the organization. This includes focusing on making
decisions by considering three crucial areas such as investment, financial and dividend. It helps
the business in several areas so that optimum utilization of resources can become successful.
This ensures regular & adequate supply of the funds to the concern, optimum utilization
of resources, planning of sound capital structures, management of cash, etc. there are several
objectives which can be accomplished by business as strategies, decision-making and controlling
(Easton and et.al., 2018). Company with help of financial management can effectively exert
several actions so that maximizing profits, tracking liquidity & cash flow, ensuring compliance
with prevailing rules. Developing financial scenarios can allow formulating proper functioning
so that dealing effectively with help of investors.
There are several types of decision which required both monetary and non financial data
so that significant aspect to deal with business can become possible. Budgeting the overall
functioning company helps in managing & mitigating the risk in turn gaining greater amount of
profitability can be attained. It basically contributes in managing and controlling the overall
financial resources in order to get the leading position in sector.
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SECTION 2
Discussing the main financial statements and explaining the use of ratios in financial
management
Financial statements are basically prepared by the organization to provide crucial information
to the stakeholders so that higher transparency & sustainability in the industry can be derived.
There are basically four types of stakeholders which are considered to be main in order to give
significant knowledge. It comprises balance sheet, income, cash flow and equity statements.
Income statement is basically associated with giving the details regarding the income &
expenditure so that insights related with profitability and loss can be assessed (What are the
Four Basic Financial Statements? 2021). It is widely taken into practice to get the insights
regarding expenses and income incurring & obtaining by business (Palepu and et.al. 2020). It
aids in making significant decision by level of operating activities conducted by firm to meet
objectives. This involves income such as rent, interest received, etc. and expenses like
administration , marketing ,etc. which are indirectly related with operational practices. It aids in
having depth understanding to analyze income & expenditure so that significant decision can be
made.
Balance sheet helps in getting the summary regarding assets and liabilities so that
financial position can be judged. It involves both current and non current assets and liabilities so
that optimizing resources for overcoming liabilities can be assessed. It is based on accounting
equation which as well comprises equity. This provides assistance in comprehensive analysis so
relevant aspects to make proper evaluation becomes possible. Current assets examples are cash,
bank, inventory, trade receivable, etc. Fixed assets such as building, machinery, car, etc which
offers benefits for more than one year. On the other side, current liabilities include short term
loan, creditors, advanced income earned, outstanding expenses, etc. and long term liabilities
comprises bonds payable, etc. Equities include retained earnings, share capital, etc. are the
example of items involved in balance sheet.
Cash flow statement presents the view of overall liquidity by showing cash transaction
activities. It includes in & out flow of cash for the particular accounting period that largely
contribute in ascertaining liquidity position. This is helpful in making proper evaluation of
financial position in turn making appropriate decision to implement suitable strategy can become
possible.
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Statement of shareholders equity is the difference between total assets & liabilities. It is largely
taken into process to evaluate how effectively funds are utilized by focusing on the components
like comprehensive income, retained earning and paid in capital.
Usage of ratios in Financial management
Ratio plays significant role in giving the crucial insights about the operational
profitability and liquidity. In the financial management ratio help in analyzing the overall
performance of the business so that prevailing lacking areas to improve functioning can become
possible. There are various types of stakeholders who required financial information so that
accurate decision related with lending, investing, supplying, etc can be done. The internal
stakeholders such as employees, owner & managers can evaluate that proper pricing strategy,
operational efficiency, etc are executed or not (Ichsan and 2021). It aids the management to
identify the limitations prevailing in the current practices for eliminating. The external
stakeholders can get the assistance to make judgment of current financial performance in turn
favorable decision to company can be made. There are number of reasons for which ratios are
used such as analyzing the trends, assist the management in taking decision, strengthening areas
by eliminating non significant actions, etc.
Forecasting & planning, budgeting, measuring operational efficiency, communicating,
controlling expenditures, etc. are benefits that are obtained by conducting ratio analysis. In the
financial management with help of ratio focusing on getting long term solvency through
establishing coordination among overall management can be done.
SECTION 3
i) Business review Template
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ii) Income statement
Attached in appendices
iii) Balance sheet
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On the basis of this it can be interpreted that there are equal assets to liabilities plus equities. There
are several assets which are helpful in getting the strong position in the industry. Company is having
good financial position in the industry.
iv) Explaining the performance of the organization by using h profitability, liquidity
na efficiency ratios
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From the evaluation of the given information regarding the liquidity ratios it can be specified that
company is having good amount of liquidity. The current ratio of the organization is 2.22 which is
higher than ideal margin such as 1.2-1.5 times. In addition to this, it can be articulated that current
assets of the organization are higher than the short-term liabilities which is indicating the performance
of the business. The current assets are 2.22 times more than the current liabilities which indicates
that there is need to pay attention on declining it. The main reason for the improvement is to ensure
that higher profitability. There is requirement to decrease the current assets as occurring of less capital
expenditure can hamper the performance of business.
Quick ratio is related with checking the ability of the organization to use cash & equivalent
assets to overcome short term liabilities. From the ascertainment of the computed ratio it can be said
that quick ratio of the company is 1.47 times. It is indicating that the cash & equal assets are equal
assets to pay off current liabilities. This is associated with overcoming liabilities with usage this
mentioned assets. On the basis of this, it can be interpreted that company has good liquidity which is
helpful in meeting the organizational objectives.
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Gross profitability is related with assessing how effectively organization is reducing the cot of goods
sold to incline the profitability. In addition to this, there are number of stakeholders like financial
institutions, lenders, competitors, etc. pay attention on having relevant aspect on it for evaluating
performance of the business. From the analysis of the provided information it can be specified that
42.76%. The ideal ratio for the gross profitability is 20% which is less than the current performance
of the organization. On the basis of this, it can be articulated that gross profitability of the mentioned
organization is higher which is indicating good financial performance. It is presenting that company
has good ability to decline the cost, appropriate pricing strategy, etc. so that profitability can be
derived.
Net profitability is concerned with estimating the ability of the company to generate the
profit by making sales revenue. From the assessment of the determined ratio it is recognized that in
current year performance of the business is effective which is grater than the standard bench marking
established by the enterprise. On the basis of this, it can be interpreted that net profitability is good
which is due to the several reasons. There are number of actions such as proper price fixation,
effective marketing & advertising activities, etc.
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Inventory turnover ratio is helpful in determining that how well business inventory is replaced
for making sales. It aids in ascertaining efficiency of the firm in order to meet the market forces.
With help of the above illustrated table it can be articulated that the derived outcome is 3.80
times. From the presented information it is analysed that business is having low efficiency in
replacing the inventory which needs to be improved by gaining competitive edge.
Total fixed assets ratio is one of the essential metrics that contribute in assessing
efficiency of firm to optimize resources for generating revenue. The presented figure for the
shown organization it can be said that business is having lower performance in utilizing assets to
create revenue in the business so that enough ability to coordinate with changing requirement of
business.
SECTION 4
Explaining the processes to improve the financial performance
In order to make improve the overall functioning of business there are several courses of
action which can be executed. From the evaluation of income statement it can be interpreted that
there are various expenses which are incurred by firm for accomplishing organization objectives.
The type of expenses which are executed includes labor, material administration, etc. These
expenses are needed to be declined for making modification in the current margin of the
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profitability (Improve your business's financial position, 2020). It can be done by applying
appropriate cost structure so that proper allocation, analyzing and controlling funds. It can as
well exerted by paying attention on eliminating the lacking are through executing variance
analysis so that obtaining standard level of performance. Implementing the price optimization
technique can aid in gaining ability to meet the expectation of customers by reaching
appropriate level of pricing.
On the basis of balance sheet it is identified that company has good level of current asset
that make it capable to coordinate with prevailing liabilities (Setiany, 2021). There is need to
decline current ratio by implementing action like increasing capital expenditure, having
inventory management system, etc so that over or under stocking of inventory can become
possible. For overcoming the liabilities firm should concentrate on using diversification method
for sources of funds in turn cost of capital & risk can be mitigated. For this purpose applying
risk management strategy can be executed to improve financial health by ignoring situation of
losses.
Implementing budgetary control allows to make the strategic planning so that managing
the business action to achieve the higher stability can become possible. It is important for the
organization to concentrate on having market analysis in turn prier insights regarding changing
market trend can be obtained there should be in the credit policy so that dealing with suppliers
and creditors in turn getting the leading position in sector can be achieved. For modifying the
overall performance of the business enhancing key performance can allow inclining employees
potential to accomplish goals (Valaskova, Kliestik. and Kovacova, 2018). In addition to this,
having knowledge regarding ratio analysis can provide assistance in meeting the compliance
with legal requirements so that paying off liabilities by using relevant method of sources. For
this action corporate governance can executed to have higher capabilities to gain trustworthiness
in market. Adopting the technological devices by disposing irrelevant assets may permit
coordinating with the changing needs of business. In order to make the improvement in the
overall performance of company attention on having relevant bench marking can aid in
achieving capabilities to alter practices modifying performance.
CONCLUSION
From the above report it can be concluded that financial management is important to plan,
organize and control resources for meeting organizational objectives. The current report has
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involved concept & significance of financial management such as budget planning, identifying
lacking areas, etc. the main financial statements like income, equity, cash flow statement and
balance sheet. There are several reasons of using ratios such as trend analysis, operational
efficiency, etc. Present study has evaluated that financial performance can be improved by
variance analysis, budgetary control, etc.
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REFERENCES
Books and Journals
Easton, P. D. and et.al., 2018. Financial statement analysis & valuation. Boston, MA:
Cambridge Business Publishers.
Ichsan, R.N. and 2021. Determinant of Sharia Bank's Financial Performance during the Covid-
19 Pandemic. Budapest International Research and Critics Institute (BIRCI-Journal):
Humanities and Social Sciences, 4(1), pp.298-309.
Palepu, K. G. and et.al. 2020. Business analysis and valuation: Using financial statements.
Cengage AU.
Setiany, E., 2021. The Effect of Investment, Free Cash Flow, Earnings Management, and
Interest Coverage Ratio on Financial Distress. Journal of Social Science, 2(1), pp.67-73.
Valaskova, K., Kliestik, T. and Kovacova, M., 2018. Management of financial risks in Slovak
enterprises using regression analysis. Oeconomia Copernicana, 9(1), pp.105-121.
Online
Improve your business's financial position. 2020. [Online]. Available through:
<https://business.gov.au/finance/accounting/improve-your-businesss-financial-position>.
What are the Four Basic Financial Statements? 2021. [Online]. Available through:
<https://www.accountingtools.com/articles/the-four-basic-financial-statements.html>
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APPENDIX
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