Importance of Financial Management

This article discusses the importance of financial management for any business, including the concept and significance of financial management, main financial statements, and the use of ratios in financial management. It also describes the processes that businesses can use to improve their financial performance.

Importance of financial
Management

Table of Contents
INTRODUCTION...........................................................................................................................1
TASK 1............................................................................................................................................1
Define and discuss the concept and importance of financial management............................1
TASK 2............................................................................................................................................3
Describe and discuss the main financial statements and explain the use of ratios in financial
management............................................................................................................................3
TASK 3............................................................................................................................................5
Income statements..................................................................................................................5
Balance sheet..........................................................................................................................6
Business profitability..............................................................................................................7
Business liquidity...................................................................................................................7
Business efficiency.................................................................................................................8
TASK 4............................................................................................................................................8
Describe and discuss the processes this business might use to improve their financial
performance............................................................................................................................8
CONCLUSION................................................................................................................................9
References:.....................................................................................................................................10
Books and Journals...............................................................................................................10

INTRODUCTION
Money or finance the lifeblood of an organisation as for the survival of the business is very
important to have a continuous flow of money in order to expand, grow and sustain the
competitive business environment (Bulturbayevich and et. al., 2020). In a business organisation
there are the several functional areas and each has different roles and responsibilities towards the
organisation. All functional areas of financial department of a business have a responsibility of
managing the finances, capital and daily cash flow of an organisation. For financial manager it is
very important to manage the finances of the business in order to handle the business capital for
future investments. Financial manager handles the business finances, allocate the funds, creates
budget, work on taxes and other several factors related to the finances and accounting of a
business. In order to protect the business from the future obligations or bankruptcy the finance
management is highly essential for any business. Importance of financial management will
discuss concept and significance of financial management, kinds of financial statements and
significance of financial ratios for the financial management. At last financial processes are
discussed to improve the financial performance of business.
TASK 1
Define and discuss the concept and importance of financial management
For the business to run its operations smoothly managing and organising all its finances is
crucial. When the business timely manages all its funds and capital at the right place as an
investment the profit turns itself into profitable and successful business enterprise. The process
of managing and allocating the finances in a manner it can earn higher profit and complies with
the legal financial rules and regulations of auditing and accounting it is termed as financial
management (Brigham and Houston, 2021). This process also involves preparing of the financial
budgets and business plans in order to maintain the flow of cash in each department of the
business. The financial manager and other experts of the finance department have responsibility
of managing the finances and financial activities of the business. Also in modern world there are
financial management software’s and systems such as ERP, accounts management system,
accounting, payment processing, fixed asset management etc. all these system has eased the
process of managing the finances and transactions of the company as they are automatic and are
easy to operate. They also save time and money of the organisation. This function of the
1

financial management system provides the current organization with true real-time visibility into
its financial status and facilitates day-to-day operations (Block, Hirt and Danielsen, 2018).
Importance of financial management
Organising and managing finance is most essential activity of a business enterprise as
involves planning, controlling and organising the cash, assets, funds, capitals and the other
financial transactions of the organisation in order to create financial stability and to gain
profitability for the organisation. The effective financial management helps in organisation to
avoid the bankruptcy or any kind of financial disruptions (Linares-Mustarós, Coenders and
Vives-Mestres, 2018). Some of the importance of financial management is outlined below:
 Financial planning: the enterprise with the utilization of financial management are able
to do effective financial planning as it is the mandatory for any enterprise to operate its
daily business activities and functions smoothly and also to avoid financial barriers. The
business profitability highly relies on the financial planning and also through which
business stakeholders and the financial managers are enable to make financial decisions
related to the business investment.
 Protecting funds: this financial practice is highly important in securing the funds of the
organisation helpful in achieving financial goals and objectives. Financial management
helps an organisation to place their funds at the right place as it results in better protection
of the money and also the allocation of funds helps business to run their functions
smoothly.
 Investment opportunities: Every business is required to make some investment into the
business after every particular time with the help of financial management companies
able to grab different investment opportunities helpful in increasing the wealth and the
health of the business (Shapiro and Hanouna, 2019). Effective financial management the
stakeholders of the organisations are able to forecast and analyse the investment
opportunities in the different segments as a stocks, properties, lands etc.
2

TASK 2
Describe and discuss the main financial statements and explain the use of ratios in financial
management
In order to operate the business operations the finances are highly important and these
finances have in communicating the business performance and needs with help of the financial
statements. They are basically the legal documents formed by the financial expert of the
company is a highly consistent and relevant with the financial information that demonstrates the
financial position of an organisation (Titman and Keown, 2018).
Income statement
Income statement is commonly known as the P&L account which demonstrates the income and
expenses and outlines rather the business is money-making or in loss during the current financial
year. Reason for preparing the income statement is to estimate the quantity of revenue or
slaughter on a business. The income statement of a business is useful in showing an interpreter
rating how much money the company has owned that is the revenue generated, amount of money
spend that is the expense and in the end the gross profit (Hosaka, 2019). The statement is
prepared in the moment of a year or 3 months. The income statement is also demonstrated in the
annual financial report of the company.
Balance sheet
The balance sheet is one form of financial statement that describes the firm’s assets, ,
equity, and liabilities within a particular time period. These entities of finances help measure
capital and rate of return. In the balance sheet, balance of assets = liabilities and shareholder
equity is very important. The financial statement is a picture of the financial health of the
business.
Cash flow statement
The cash flow statement is segregated into sections: cash generated from operating
activities, investment activities and financing activities. The cash flow statement tells the
company's solvency and liquidity, which are essential to the survival and development of the
company. This financial statement also demonstrates the inflow and outflow of corporate cash.
The financial statement can be used to allocate business funds and capital as investment in
different places within and outside the company (Murad and et. al., 2019).
3

Accounting ratios of the financial ratios are used to measure and analyse the business
performance by calculating different types of ratios by which business operators easily depict the
business wealth and health. The importance of calculating financial ratios is highlighted below:
 The financial ratios are highly important in planning and analysing the business financial
position. There are four basic type of financial ratios which are effective demonstrating
the business profitability, liquidity and turnover. All this makes it easy for a business to
forecast future financial position as well as to understand how much current assets
company currently has or lacks in.
 Calculating financial ratios also help company to compare its current financial position
with the previous years or with the other companies. It is useful in analysing the
company's current assets and liabilities which can be compared with the previous year’s
data which creates a benchmark for a company to improve its current financial
performance for to understand how much profit company has earned more in a year.
 Most importantly the financial ratios are important it in the financial decision making as
there are able to represent the weaknesses and strengths of the company in terms of
profitability obligations liquidity assets liabilities x factor which are highly important for
a business owner and the shareholders while making the financial decisions. These
aspects of the company help a financial expert to make a rightful decision for a company
to invest or not (Čergić and Kozarević, E., 2019).
4

TASK 3
Income statements
5

Balance sheet
6

Business profitability
This is profitability is primary goal of every organization between presence how much
profit a company has owned in the overall fiscal year. As per the above case study the company
has a profit of 12 is 127% any year 2015 and 2016. The profitability of the company is higher
representing the sound financial performance of the business and growth and development of
business in a year. Also in regards of ratio analysis the business profitability is highly efficient as
a gross profit margin is 42.8% and net profit margin is 22.7%.
Business liquidity
Liquidity define the amount of obligations that organisation has to repay at the year end.
Business liquidity defines that company has less assets to repair its obligations. Quick ratio and
current ratio analysis are the most suitable methods to analyse the business liquidity. Cape of
financial statements of the company does observed that the company has a capability to paid
short term obligation do the help of the current ratio analysis it was analysed that companies
solvent with 2,22 £ of assets and 1 £ liability (Zada, Yukun and Zada, 2021). Also after
excluding the inventory of the company the company is liquid as it has 1,47 £ which can easily
cover 1£ liabilities.
7

Business efficiency
Through the analysis of the company’s asset turnover rate for every pound invested in the
company, there is a return of 2.26 pounds, which shows that the funds invested in the company
are effectively executed and managed, which helps to earn more than 226% of return on
investment for its owners and shareholders .
TASK 4
Describe and discuss the processes this business might use to improve their financial
performance
In order to evaluate and monitor the business performance company's financial are
observed and analysed to measure financial performance. Ratio analysis is one of the technique
by which companies analyse their finances and profitability this is useful in understanding the
business performance as well as that are also reflected in the financial reports of the company.
Different financial ratios are calculated and analysed below:
Quick ratio: this is the ratio which is also referred as the acid test ratio and is considered under
the liquidity ratio because it is helpful in measuring the business ability to pay their obligations.
The quick ratio is derived by dividing the current assets with the current liabilities. Current assets
exclude the inventory and include cash, cash equivalents, cash receivables and short term
liabilities. This is the most easiest ratio to analyse the company ability to pay its current liability
with its current assets if the assets are low compared to the current liabilities then company has
to manage its expenses in order to earn more profit that can increase the value of current assets
and also the financial performance of the company (Zada, Yukun and Zada, 2021).
Quick ratio = (Current assets – inventory) / current liabilities
= (84349 – 28571) / 37928
= 1.47: 1
Gross profit ratio: the type of ratio is considered under the profitability ratio and is helpful in
measuring for comparing gross profit of the company with the net sales. This ratio is highly
8

important and useful in enhancing the business performance as it measures the profitability of the
business in contrast of Inventory Company is selling. This ratio effectively calculates the profit
from the sales of the inventory which is useful for the organisation in paying operating expense.
The formula to measure or calculate gross profit ratio is subtracting the net sales from the cost of
goods sold. High gross profit ratio represents high profit percentage over the selling inventory.
Gross profit margin= 81125 / 189711 * 100
= 42.76%
Current ratio:
Current ratio = Current assets / current liabilities
= 54349 / 37928
= 2.22:1
Working Capital:
Working capital ratio= current assets – current liabilities
= 54349 – 37928
= 16421
CONCLUSION
It is concluded from the above report that for any organisation managing all its funds, capital,
assets and liabilities is crucial task. For a business to expand, grow and prosper in the existing
and the current market the most important task is to manage all its finances for better financial
decision making. By maintaining different financial records and statements of the company is
able to analyse its business performance effectively which is useful during the financial
management. The measurement of ratio through income statement and cash flow helps the
company to identify its profits, liabilities, current performance etc. that is important aspect of
understanding business performance and financial management.
References:
Books and Journals
Block, S.B., Hirt, G.A. and Danielsen, B.R., 2018. Foundations of financial management.
McGraw-Hill Education.
Brigham, E.F. and Houston, J.F., 2021. Fundamentals of financial management. Cengage
Learning.
9

Bulturbayevich, M.B and et. al., 2020. Modern features of financial management in small
businesses. International Engineering Journal For Research & Development, 5(4), pp.5-
5.
Čergić, F. and Kozarević, E., 2019. The impact of performance analysis on the financial
management and control at public universities in Bosnia and Herzegovina
Federation. Management: Journal of Contemporary Management Issues, 24(2), pp.145-
153.
Hosaka, T., 2019. Bankruptcy prediction using imaged financial ratios and convolutional neural
networks. Expert systems with applications, 117, pp.287-299.
Linares-Mustarós, S., Coenders, G. and Vives-Mestres, M., 2018. Financial performance and
distress profiles. From classification according to financial ratios to compositional
classification. Advances in Accounting, 40, pp.1-10.
Murad, M.H., Wang, Z., Chu, H. and Lin, L., 2019. When continuous outcomes are measured
using different scales: guide for meta-analysis and interpretation. bmj, 364.
Shapiro, A.C. and Hanouna, P., 2019. Multinational financial management. John Wiley & Sons.
Titman, S. and Keown, A.J., 2018. Financial management: Principles and applications. Pearson
Education, Inc..
Zada, M., Yukun, C. and Zada, S., 2021. Effect of financial management practices on the
development of small-to-medium size forest enterprises: insight from
Pakistan. GeoJournal, 86(3), pp.1073-1088.
10