Importance of Financial Management for Business Organizations

This report discusses the concept and importance of financial management for businesses, including the main financial statements and the use of ratios in financial management. It also provides a case study analysis and suggests processes that businesses can use to improve their financial performance. The report is relevant for students studying BSc (Hons) Business Management with Foundation and BMP3005 Applied Business Finance.

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:
Name:
ID:
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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
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
Organization (see Case Study). This should be included within
your appendices 9
iii. Using Excel completing the Balance Sheet 10
iv. Using the Case study information describing the profitability,
liquidity and efficiency of the company based on the results of
ratio analysis 11
Section 4: Using examples from the case study describing and
discussing the processes this business might use to improve their
financial performance 12
Conclusion 13
References 14
Appendix 15
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Introduction
Business finance refers to the collection of funds by the business owners to
fulfill the business requirements relating to finances which may include commencing
a business, purchase of raw materials, investing in capital assets and completing
other economic activities. It is also utilized for allocation of resources, creation of
economic analysis, reviewing opportunities for financing and other respective
business functions (Chalaki, Mansourfar and Karami, 2018). In this report, an
overview of the concept of financial management along with the importance it holds
in a business environment is explained. The report also contains discussion
regarding the different types of financial statements and preparation of the
statements along with a ratio analysis of the business.
Section 1: Definition and discussion of the concept and
importance of financial management
Financial Management is a business function which deals with the investment
of various financial resources of a business organisation to generate higher profits
and greater Return on investment (ROI) for the business. The financial management
professionals formulate various business financial plans and procedures, organizes
them and controls the respective transactions of the business to allocate the funds in
an optimized manner and generate greater financial benefits.
Importance of financial management:
The financial management in a business organisation is an essential concept
as it assists to formulate the policies, determine the objectives, plan out the
procedures and implement the programs along with the allocation of the budget
which relates yo different financial activities. With an effective financial management,
the business can ensure that the funds are allocated at an effective place and
generate the efficient financial returns that the business aims at (Eppich and Grinda,
2019). The core activity of financial management involves:
1. Making sufficient funds available.
2. To maintain a balance between the incomes and expenses for ensuring
financial stability.
3. Ensure efficient and high ROI.
4. Creation and execution of business growth and expansion programs.
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5. Safeguarding the business against any market uncertainties by ensuring
buffer funds.
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Section 2: Description and discussion of the main
financial statements and explain the use of ratios in
financial management
There are three major financial statements that assists a business in
managing its financial position as well as be aware of it. They are:
1. Balance sheets: A balance sheet assists the business by providing with a
detailed information relating to the assets, liabilities and shareholders equity
of the business. Assets are the things which are owned by a business
organization which can be both sold or utilized by the business. These include
physical property, plants and machinery and business inventory (Jones and
et.al., 2018). The liabilities refers to the money which the business owns to
outsiders and other persons or even institutions. These includes all types of
obligations such as borrowing money from banks, renting a building or money
owned to raw material suppliers. Shareholders equity refers to the business
net worth or capital. This displays the money which would exist after the
business sells all its assets and pays off all the business liabilities. This
money is of company shareholders or the business owners of the
organisation. The formula below summarizes a balance sheet:
ASSETS = LIABILITIES + SHAREHOLDERS' EQUITY
2. Income statements: An income statement is a report which displays the
amount of revenues which is earned by a business organisation in a particular
time period. This shows both the expenditures as well as incomes which is
generated by the business. The final amount usually depict the net revenues
that is earned after subtracting all the business costs and expenses
associated with a particular revenue generation. This refers to the amount
which a company earned in a particular accounting period.
3. Cash flow statements: The cash flow statement are a report of all the cash
inflows as well as cash outflows which are generated in he business in a
particular accounting period (Jorge, de Jesus and Nogueira, 2019). This
calculation is necessary as it is important for the company to be aware pf the
amount of cash that it has in hands to ensure there is enough cash available
withing the business. This statement states whether a business has
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generated enough cash from its various activities or not. There are three
major activities which are part of cash flow. Cash flow from Operating activities: This analyzes the cash flow from the net
incomes or losses from the core business activities such as sales of goods,
payment to creditors and some more. Cash flow from investing activities: This shows the cash flow which has been
generated by the various investing activities in the business such as purchase
of plants and machinery, sale of land and many more (Lubis, 2021).
 Cash flow from financing activities: This explains the amount of cash flow
which has been attained through various financing activates in the business
such as cash raised through sale of stocks, payment of bank loan and many
more.
Financial Ratios: The financial ratios are a form of quantitative data extracted
through company's financial statements that help to determine the relationship
between two or more than two financial elements and derive a relationship to assess
the financial performance of the business with itself or with other business
organisation. There are three major types of ratios:
1. Liquidity Ratios: These ratio help to ascertain the ability of the enterprise to
pay off its current liabilities by utilizing the business quick assets or near cash
without raising any additional capital. It helps to evaluate the short term
solvency of the business. The two primary liquidity ratios are:
 Current ratio: This ratio measures the obligations of a business which relate
to payment of the short term obligations of the business which are due within
one ear with the help of current assets.
Current ratio= Current assets/ Current liabilities
 Quick ratio: This ratio utilizes the most quick assets or near cash resources
to pay off and retire its current liabilities (Luther and et.al., 2018).
Quick ratio= (Current assets-inventories) / Current liabilities
2. Efficiency Ratios: The efficiency ratios help to measure how efficiently and
effectively the business utilizes all its assets for the purpose of generating
business revenues and the management of those assets.
 Total asset turnover ratio: It measures the efficiency of an enterprise to
generate revenue or sales through its assets.
Total asset turnover ratio= Sales / Total assets
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 Fixed assets turnover ratio: It analyses and measures the efficiency of an
enterprise pertaining to the utilization of its fixed assets.
Fixed assets turnover ratio= Sales / Fixed assets
3. Profitability Ratios: The profitability ratios in an organisation are majorly
used by the investors and analysts to measure and evaluate the ability of a
business to generate profitable income through revenues that are associate
with balance sheet assets, operating costs and shareholder's equity for a time
period (Narkabilova, 2021).
 Gross profit ratio: It measures the relationship between the two variables
relating to the revenue and the gross profit of the business.
Gross profit ratio= (Gross profit* 100) / sales
 Net profit ratio: It measures the relationship between the company revenue
and the net profits earned by the business.
Net profit ratio= (Net profit*100) / sales
 Operating profit ratio: It analyzes the operational efficiency of the company.
This ratio evaluates the operating profits after eliminating all business costs
and expenses except interest and taxes.
Operating profit ratio= (Operating profit * 100) / sales
Section 3: Using the template provided:
i. Completing the Information on the ‘Business Review Template
(Ensure that you display your calculations for this detail)
The Net Profit for the year 2016 , is £43057000 (2015: £18,987,000).
The Company’s key financial and other performance indicators during the year were
as follows:
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%
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Average number of employees 649 618 5.00%
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 (White and et.al., 2021).
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%
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Notes to the financial statements as at 31st 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
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5. Overheads
2016 2015
£000 £000
Administrative Expenses 13,751 20,251
Other Operating Costs 22,374 34,293
Interest 1,943 7,081
Total Overheads 38,068 61,625
ii. Using Excel producing an Income Statement for the Sample
Organization (see Case Study)
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iii. Using Excel completing the Balance Sheet
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iv. Using the Case study information describing the profitability,
liquidity and efficiency of the company based on the results of ratio
analysis
The case given in the report shows that the profitability ratios are better than
the previous year but the ratio in itself are very low according to the industry margins
when compared to organizations in the similar markets. The business should aim at
bringing efficiency and effectiveness in the operations of the company so that it could
generate higher profits and better value for the company stakeholders (Nguyen,
Nguyen and Andrikopoulos, 2022). The management should look for areas where it
can achieve better results with effective production and operations implementation.
The liquidity position of the company through current ratio at 2.2:1 shows that the
current assets of the company are sufficient to meet all the emergency requirements
relating to current liabilities. The efficiency of the business is relatively good in
comparison with other businesses in the same industry. It shows that the operations
of the business are being conducted and completed in an effective manner. The
business is making effective use of its raw materials, labor and capital to realize the
products and business services effectively.
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Section 4: Using examples from the case study describing
and discussing the processes this business might use to
improve their financial performance.
If the business aims at improving its efficiency than it should start focusing upon
its major operations and how well it is able to complete its operations and realize the
financial benefits and results from them. The business should start with having a strict
check on its productions and operations so that all major loopholes in them could be
measured and any inefficient areas could be removed from the process. This would
assist to reduce the cost of productions which will help to improve the business
efficiency (Tuffour, Amoako and Amartey, 2020). The business could utilize various
strategies to improve the business performance, some of them are:
 Capital budgeting techniques: The business should aim at effectively
identifying the opportunities and steps that are necessary for the business and
should be implemented to improve the financial performance and efficiency of
the business organisation. It will help the business to distinguish the
operations which require business processing and financing to ensure
successful implementation of the same.
 Monitoring the operations and results: the business should effectively aim
at monitoring the business operations and analyzing the business results.
This is an essential task if the company want to effectively improve its
financial performance in the long run. Keeping a check on the progress that
the business operations make and identify areas which create problems in
effective implementation of the same (Vasile and Ion, 2019). This will help to
eliminate such areas and attains successful completion of tasks and profitable
results in the end.
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Conclusion
From the above report it can be concluded that financial management is an
essential part of business organizations in the present business environment. It
assists in effective management of business finances so that the business can
operate effectively and continue its operations till the long term. The report also
concludes upon the importance of financial statements and a brief overview of the
same including balance sheet, income statement and the cash flow statement. The
report draws conclusions for the company ratios and analysis of the same. The last
part of the report concludes upon the discussions relating to steps the business culd
use to improve its financial performance and efficiency.
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References
Chalaki, P., Mansourfar, G. and Karami, A., 2018. Review the effect of Management
Ability on the Financial Distress, with an emphasis on Financial Flexibility in
Tehran Stock Exchange listed companies. Financial Accounting
Knowledge, 5(1), pp.153-180.
Eppich, R. and Grinda, J.L.G., 2019. Sustainable financial management of tangible
cultural heritage sites. Journal of Cultural Heritage Management and
Sustainable Development.
Jones, C., and et.al., 2018. Financial Management for Nurse Managers and
Executives-E-Book. Elsevier Health Sciences.
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.
Lubis, A.W., 2021. Conceptualizing financial capability: evidence from
Indonesia. International Journal of Ethics and Systems.
Luther, R., and et.al., 2018. Generational differences in perceptions of financial
planners. Journal of Financial Services Marketing, 23(2), pp.112-127.
Narkabilova, G., 2021. ON THE IMPORTANCE OF DEVELOPING FINANCIAL
LITERACY AMONG PRIMARY SCHOOL PUPILS. Theoretical & Applied
Science, (5), pp.219-221.
Nguyen, T., Nguyen, T. and Andrikopoulos, P., 2022. CEO Financial Experience and
Firms’ Earnings Management in M&A: the importance of Experience
Specificity.
Tuffour, J.K., Amoako, A.A. and Amartey, E.O., 2020. Assessing the effect of
financial literacy among managers on the performance of small-scale
enterprises. Global Business Review, p.0972150919899753.
Vasile, E. and Ion, C., 2019. MANAGEMENT CONTROL AND FINANCIAL
MANAGEMENT WITHIN ECONOMIC ORGANIZATIONS. Internal Auditing &
Risk Management, 14(4).
White, K., and et.al., 2021. How financial socialization messages relate to financial
management, optimism and stress: Variations by race. Journal of Family and
Economic Issues, 42(2), pp.237-250.
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Appendix:
Income Statement
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