Importance of Financial Management

This report explains the concept and importance of financial management, main financial statements, and uses of ratios in financial management. It also provides recommendations on improving the current performance and position of a company.

IMPORTANCE OF
FINANCIAL
MANAGEMENT

Table of Contents
INTRODUCTION ..........................................................................................................................3
SECTION 1......................................................................................................................................3
Identify and explain the concept and importance of financial management..........................3
SECTION 2......................................................................................................................................4
Explain and elaborate main financial statements. Also explain the uses of ratios in financial
management............................................................................................................................4
SECTION 3......................................................................................................................................6
(I) Completed business template............................................................................................6
(ii) Prepare income statement in excel...................................................................................6
(iii) Prepare the balance sheet.................................................................................................7
(iv) Calculation of ratios and interpreting the same...............................................................7
SECTION 4......................................................................................................................................9
Give recommendation on current performance and position of a company..........................9
CONCLUSION .............................................................................................................................10
REFERENCES..............................................................................................................................11
APPENDIX....................................................................................................................................12

INTRODUCTION
The report prepared below reflects the concept and importance of financial management
(Khan and et.al., 2021). It explains how funds collected by the business and company can be
managed in a given time frame and the possible ways that would contribute to increase the profit
or revenue generated. There are many decisions that are connected with finance such as
investing, production, purchase of goods and services. It also helps in planning, implementing,
controlling and improving the working and functioning of a business. It serves as a guide for
users to understand uses of ratios in financial management and the ways that would asses in
improving the financial performance and position in market. Thus there are many ways that
would help the company to make efficient use of scarce resources and develop a competitive
image in the environment. There are statements like balance sheet, cash flow and income
statement that reflect a clear and transparent picture of the business and let the external as well as
internal users to predict related risk and opportunities as well.
SECTION 1
Identify and explain the concept and importance of financial management.
Finance can be explained as a necessity in every business without which carrying out any
operation or activity is impossible. It focuses on investing available funds in such a way that it
brings maximum returns from investment made and reduces the cost incurred in the company.
Financial management can be explained as a process which ensures that business is having
adequate funds available for developing future based plans, covering of debts, optimum
utilisation of resources. It helps to perform business related functions such as management of
supply chain, promotion of goods and services, preparation of strategies and policies (Bongomin
and et.al., 2018).
Importance of financial management:
 It helps in financial planning: Financial management provides a base for planning and
allocating limited funds in best possible ways that would help to increase the revenue
generated by the firm. It helps to plan in advance what can be done and how can the
operations be carried out.
 Assists in minimizing cost and add value towards the company: It helps to reduce the
cost incurred whole carrying out activities which would save funds for other operations

as well. Managing funds well in advance helps to have a proper control over wastage
and unnecessary expenses taking place in a enterprise over a period of time (Tram and
et.al., 2021).
 It provides assistance in acquiring and management of funds: It is clear that without
management and generation of funds a business cannot stand in a market any longer
thus with the help of financial management it would be easier for the companies to
understand the importance and usefulness of collecting adequate funds and investing
them at places that would assess maximum returns.
 Guides in decision making: Financial management helps in taking decisions that would
help to decide among the best alternatives available as which option would be best
suitable for the business. It helps to decide the best ways that would contribute in
development and expansion of company. It also guides to have a better understanding
as how the debts can be covered well in time so it doesn't affect the running of business
in negative ways.
SECTION 2
Explain and elaborate main financial statements. Also explain the uses of ratios in financial
management.
Financial statements and records reflect important details & information of company that
takes in account income and expenditure incurred in business, assets & liabilities, cash inflow,
fund outflow and contribution of shareholders in development of firm in market. Some main type
of financial statements can be explained as under:
 Cash flow statement: It can be explained as record that helps to understand the
movement of cash over a period of time. It helps people to have an idea about
activities that can be carried out if adequate funds are available with the company.
It can further be described as investing, financing and operational as well (Caprio
and et.al., 2020). Cash flow recorded from operating activities helps the company
to understand revenue generation from operation. User can understand business
cash flow from investing activities by having an overview of cash movement
taking place in areas dealing with stocks, securities and bonds. Financing areas
can be explained by purchase or sale of fixed assets by firm over a period of time.

 Balance sheet: It is also known as statement of financial position that reflects the
balance of liabilities, equity and assets at the end of financial year in a business
enterprise. It also helps to ascertain the net worth of company and its current
financial position in market (Glaser, 2018). Net worth of a firm can be calculated
by deducting liabilities from total assets. It helps the investor to have an idea
whether making investment in a particular company would result to be a fruitful
decision or not.
 Income statement: It is also referred as statement that helps to evaluate financial
performance of a business that would be helpful for similar type of companies,
entities and competitors as well. The information reflected through such statement
is expenditure incurred, profit earned, loss and costs associated with the running
of enterprise.
There are many essential uses linked with calculation of ratios in a business. It helps to predict
and calculate net profit margin business is enjoying at present. There are some ratios such as
Gross profit, Net profit, Current, quick ratios, asset turnover ratio and working capital ratios as
well. Ratios are important in business because:
 Net profit ratio helps to evaluate overall profitability of a business after deducting cash
and cash expenditures.
 Gross profit indicates operating profit in a company after updating necessary changes in
relation with cost of goods sold.
 Current ratio helps to understand the liquidity of a firm that would guide to find a way for
covering debts in a year.
 Quick ratio can be explained to gather information that would evaluate the ability of a
firm for paying its liabilities on immediate grounds.
 Operating profit can be explained to examine the condition of a company and its financial
capability to cover its shorty term as well as long term debts associated with the
enterprise (Kengkathran, 2018).
 Return on capital employed is helpful to understand the profitability of a company in
respect with the amount invested in a firm.
 Ratios help to predict future performance of a business on the basis of current results
observed (Jain, McInish and Miller, 2019).

SECTION 3
(I) Completed business template.
(ii) Prepare income statement in excel.
In appendix

(iii) Prepare the balance sheet.
(iv) Calculation of ratios and interpreting the same.
 Efficiency ratios: It helps the company to evaluate the capability to put assets to use and
make proper handling of liabilities in a smooth manner. It takes in account the activity
based ratios that involves inventory turnover ratio, working capital ratio and asset
turnover ratio (Lee, 2019).
Calculations for efficiency ratio for year 2016 is done below:

Interpretation: From the above calculation of ratio, it can be interpreted that the company is
having available current asset in double quantity when compared with liabilities. It thus reflects
that enterprise has the capability to cover its debts on time and pay back its liabilities at the time
of liquidation as well (Durband and et.al., 2018).
 Profitability ratios: It is a technique that helps to evaluate the efficiency and effectiveness
of the company for increasing the profit & revenue generation for shareholder's. When
compared with other companies it assess the performance in order of magnitude and
guide to take correct measures for futuristic results.
Calculations carried out for profitability ratio for year 2016 is as under:
Interpretation: From the above calculated ratio gross profit resulted as 42.80% and net profit so
far is 22.70%. The average profit calculated so far by business is not adequate thus it is advised

that the enterprise must focus on improving the revenue generation and earning associated with
the firm.
 Liquidity ratios: It helps to ascertain capacity scale to pay back debts by the business for
short term obligations. There are three types of ratios that are being included in such
categories such as quick ratio, cash ratio and current ratio.
Calculations for liquidity ratio for year 2016 is done below:
Interpretation: From the above calculated ratio done for finding liquidity of the firm, it can be
interpreted that liquidity maintained by company is sound and it has the capability t cover its
short term debts well in time. The ideal current ratio assumed is 2:1 thus from above results
carried out It can be said that the company has a good liquidity ratio. The organisation's liquid
assets are ideal and further it is suggested that it must be used at right place for increasing quick
ratio of a business.
SECTION 4
Give recommendation on current performance and position of a company.
The necessary step in case of enterprise must be to improve its current financial position
by formulating effective strategies and planning efficiently that would incur less cost and
generate more profits (Venter and et.al., 2018). It must focus on reconsidering plans
implemented at present time that are helping to fulfil goals and objectives set by enterprise. It
would further help to reach its targets well in time that in return would help to improve scale of

profitability and rearranging operating expenses of firm in such a way that would assist to cut
down expenses and increase revenue. If operating expense of the business is reduced then it will
also help to improve it will help to contribute in facilitating positive changes in operating ratio.
Another useful step that would help in producing positive results in business can be to invest in
ideal assets of a business in such a way that it functions in a productive way. The investment
must help to lower down the risks and assess in earning higher rate of return. It is further advised
that creditor period must be monitored on a frequent basis, it is thus observed that receivable
collection period must be less that reflect that debtors are covering their dues within time frame.
When operating cycle of business is covered in lesser duration it reflect that adequate amount of
liquidation is present in company. The optimum scale of liquidity assures that there is smooth
carrying out of activities in firm. The main objective of every business is to improve wealth of
the business which is possible if the dividend is distributed in right amount to its linked
shareholder's.
CONCLUSION
The report prepared above explains the uses of financial record and statements for
business as well as for users that are linked with the working & functioning of companies present
in market. It helps them to understand how financial management contributes in procurement of
funds and investing them at right place in right amount at right time. It is thus necessary for
business to manage its funds in such a way that it would help to double the investment made and
decrease the risk & cost prevailing around the organisation. It can be concluded from above
prepared records that it is necessary for every enterprise to maintain records in a precise manner
so that it helps to develop innovative techniques and qualities in services provided. Financial
management is a tool that helps to choose best option from alternatives available for allocation of
resources and minimizing the wastage as well.

REFERENCES
Books and Journals
Khan and et.al., 2021. Intellectual capital, financial resources, and green supply chain
management as predictors of financial and environmental performance. Environmental
Science and Pollution Research. 28(16). pp.19755-19767.
Bongomin and et.al., 2018. Nexus between financial literacy and financial inclusion: Examining
the moderating role of cognition from a developing country perspective. International
Journal of Bank Marketing.
Tram and et.al., 2021. Constructing a composite financial inclusion index for developing
economies. The Quarterly Review of Economics and Finance.
Caprio and et.al., 2020. Cash holdings in family firms: CEO identity and implications for firm
value. European Financial Management. 26(2). pp.386-415.
Glaser, J., 2018. A New Era in IT’s Strategic Importance. In Glaser on Health Care IT (pp. 147-
150). CRC Press.
Kengkathran, S., 2018. A literature review on the impact of environmental, social and
governance (ESG) disclosure on financial performance of energy companies in
Asean. Global Business and Management Research. 10(3). p.1071.
Jain, P.K., McInish, T.H. and Miller, J.L., 2019. Insights from bitcoin trading. Financial
Management. 48(4). pp.1031-1048.
Lee, H.W., 2019. Applying online educational technology to foster financial literacy: Financial-
institution leaders' insights. The Qualitative Report. 24(10). pp.2625-2654.
Durband and et.al., 2018. Financial Counseling. Springer.
Venter and et.al., 2018. The role of accounting and the accountancy profession in economic
development: a research agenda. Journal of International Financial Management &
Accounting. 29(2). pp.195-218.

APPENDIX