Importance of Financial Management in Business - Desklib

This report discusses the concept & importance of financial management, main financial statements, and ratio analysis. It also presents processes to improve financial performance. The report evaluates the profitability, liquidity, and efficiency of the company using ratio analysis. It includes a business review template, profitability statement, and statement of financial position. The subject is financial management, and the course code, name, and college/university are not mentioned.

Financial Management

TABLE OF CONTENTS
INTRODUCTION ..........................................................................................................................3
SECTION 1 .....................................................................................................................................3
Defining and discussing the concept & importance of financial management ...........................3
SECTION 2 .....................................................................................................................................4
Describing the main financial statements along with the use of ratios .......................................4
SECTION 3 ....................................................................................................................................6
i. Complete the Information on the ‘Business Review Template ...............................................6
ii. Profitability statement for the period of 2016..........................................................................7
iii. Statement of financial position ..............................................................................................7
iv. Commenting on the profitability, liquidity and efficiency of the company using ratio
analysis.........................................................................................................................................8
SECTION 4 ...................................................................................................................................11
Presenting the processes which business might use to improve their financial performance 11
CONCLUSION .............................................................................................................................13
REFERENCES .............................................................................................................................14
APPENDIX....................................................................................................................................15

INTRODUCTION
In the context of business unit, financial management is considered as highly significant
because it places emphasis on the effectual procurement and utilization of funds. Finance
manager of the business unit is accountable to take appropriate decisions regarding financing,
investment etc so that organizational goals can be achieved. In this, report will provide deeper
insight about the extent to which financial management required for ensuring smooth functioning
of operations. It also entails how financial statements can be used for assessing financial position
and performance of firm. Report also highlights process which business unit requires to follow
for enhancing growth and overall performance.
SECTION 1
Defining and discussing the concept & importance of financial management
Financial management is highly concerned with the planning and directing pertaining to
the company’s fund. It lays more focus on monitoring aspects related to profitability, cash
inflows & outflow, credit etc (Brigham and Houston, 2021). Through this, finance manager
identifies the extent to which funds are available within business unit for performing business
activities satisfactorily.
Importance of financial management for an organization is enumerated below:
There are different kinds of the crucial roles which are played by financial management
that helps the organization to receive number of benefits (Finkler, Calabrese and Smith, 2022).
The one of the significant practice that can be exerted with it is having effective ability to
formulate fanciable planning which aids in managing funds in higher reliable manner. The find
allocation can be properly done via having financial management so that critical decision-making
can become possible. This provides assistance in recognizing the irrelevant components so that
can be eliminated to avoid financial losses (Kembauw and et.al., 2020). In addition to this,
reducing risk, optimum utilization of resources, higher efficiency and profit maximization can be
obtained. Unforeseen situation can be effectively done by having financial management into
business which can uplift the ability to manage and control challenges gaining success.

SECTION 2
Describing the main financial statements along with the use of ratios
Financial statements exhibit record of business activities in a quantitative manner and
thereby highlights company’s performance during the concerned time period. With the motive to
evaluate business aspects and for getting information about business firm prefers to prepare final
accounts. There are mainly four types of accounts which business organization prepares such as:
Income statement
By preparing profitability statement business entity can get information about operating
results. Moreover, income statement furnishes information about sales, other income and
expenditures (direct and direct). Hence, through the means of profitability statement, at the end
of an accounting period manager can take significant decisions about cost control and profit
maximization.
Balance sheet
This is one of the main financial statements which firm prepares with the motive to get
detailed information about assets and liabilities. Assets mainly presents information about
current and fixed assets (Brigham and Daves, 2021). On the other side, liabilities can be
distinguished into three namely current, long-term liabilities and shareholders’ equity.
Assets = Liabilities + shareholders’ equity
Cash flow statement
It provides information about cash inflows and outflows under different categories such
as operating, investing and financing (The four basic financial statements, 2022). By this,
manager would become able to know company’s cash position and meanwhile take effectual
measures for control.
Statement of changes in equity
SOCE is prepared by firm for getting information about changes take place in shares
(sales or purchase), dividend payment etc.

Use of ratios in financial management is mentioned below:
There are several reasons for which ratios in financial management in company is used.
It helps the organization to gain greater ability to evaluate performance of firm.
The one of the significant use of ratio is to compare performance of firm with its historical data.
It can as well be compared with the other firms operating in the industry that aids in ascertaining
its position in sector (Jagadish and SHARMILA, 2021). Information regarding the performance
trend can be achieved that can be useful in recognizing the lacking areas so that improvement
action implementation become possible. Determination of the operational efficiency can be
properly done via paying attention on the company's assets and liabilities. This tends to give
emphasis on understanding the efficiency to manage and control overall processing of firm that
permits making relevant judgment about firms performance (Guerard, Saxena and Gultekin,
2021). Liquidity & solvency of the business can be properly assessed by having ratio analysis.
These is helpful in evaluating that how company is performing so that better decision-making for
the improvement can be taken.

SECTION 3
i. Complete the Information on the ‘Business Review Template

ii. Profitability statement for the period of 2016
Enclosed in appendix.
iii. Statement of financial position
Balance sheet as at 31st December is enumerated below
Particulars 2016
Total
£0
Non-Current assets
Intangible assets 5,793
Tangible assets 52,812
Investments 10,693
69,298
Current assets
Stocks 28,571
Trade debtors 26,367
Short term deposits 14,779
Cash at bank and in hand 14,632
84,349
Current liabilities
Bank loans and overdrafts 9,610
Trade creditors 19,493
Other Creditors 678
Income tax payable 3,585
Other creditors including tax and social security 4,562
37,928
working capital 46,421
Total assets less current liabilities 115,719
Non-Current Liabilities

Bank loans and overdrafts 16,506
Other Liabilities 7,304
23,810
Provisions for liabilities 8,094
Net assets 83,815
Capital and reserves
Called up share capital 39,436
Reserves 1322
Retained earnings 43057
Total equity 83815
iv. Commenting on the profitability, liquidity and efficiency of the company using ratio analysis
Ratio analysis may be defined as a quantitative tool which helps in assessing and
evaluating business performance from several perspectives such as profitability, liquidity etc. By
this, company can measure the extent to which performance has been improved or deteriorated
over the time frame.
Ratio analysis of the firm for the period of 2016 is as follows:
Profitability ratios
Particulars Formula 2016
Gross profit 81125
Net profit 43057
Net sales 189711
GP ratio Gross profit / Net sales * 100 42.76%
NP ratio Net profit / Net sales * 100 22.70%

from the evaluation of the given information it can be interpreted that gross profitability
for the mentioned period is 42.76%. It is indicating good ability to reduce of cost of goods sold
so that higher profitability can be obtained. In addition to this, the net profitability for the
specified period involves 22.70% which is higher than ideal margin. It is reflecting good position
to generate revenue in the industry. On the basis of this, it can be interpreted that profitability of
firm is good.
Liquidity ratios
Particulars Formula 2016
Current assets 84349
Stock 28571
Current liabilities 37928
Current ratio Current assets / current
liabilities
2.22
Quick ratio Current assets – (stock +
prepaid expenses) / current
liabilities
1.47

The above depicted table shows that, in the year of 2016, current and quick ratio of the
firm accounted for 2.22 & 1.47 respectively. According to the ideal framework business unit
must have 2 current assets for fulfilling 1 short term obligation. Referring this, it can be
presented that liquidity position of the firm was good in the concerned period. Moreover,
company has maintained enough balance of current assets in against to the liabilities with the
motive to ensure enough working capital. Further, quick ratio of the business organization was
also in line with the ideal ratio such as .5:1. This in turn entails that company can quickly coverts
its current assets such as debtors, cash etc for dealing with liabilities.
Efficiency ratios
Particulars Formula 2016
Cost of goods sold 108586
Inventory 28571
Stock turnover ratio COGS / Average stock 3.80
Net sales 189711
Fixed assets 69298
Fixed assets turnover ratio Net sales / fixed assets 2.74

On the basis of the above presented information regarding the efficiency it can be
identified that firm is possessing good performance. The stock turnover ratio is presenting how
efficient firm is replacing is inventory which is found to be 3.80 times. This is considered to be
lower as the ideal ratio it should be higher than 5 times. This is indicating requirement of the
improvement so that proper financial condition can be received. In addition to this, fixed assets
turnover ratio is 2.74 times which is presenting that there is good performance as higher than the
standard bench marking.
SECTION 4
Presenting the processes which business might use to improve their financial performance
There are availability of the different kinds of the methods which can be used by
organization for having appropriate improvement into the overall process (Ways to Improve Your
Company Financial Position, 2022). From the evaluation of the income statement it can be
mentioned that there is good profitability but emphasis on reducing cost to have economies of
scale should be given. There is presence of good profitability which tend to ensure that company
pay attention on developing relevant pricing strategy so that continuous uplifting performance
can be obtained. On the basis of the balance sheet it can be recognized that there are various

assets and liabilities which are possessed by firm. The firm should give emphasis on declining
the liabilities so that higher efficiency and credibility in market can be obtained.
There is lack of stock turnover which can be improved by applying the having inventory
management system. This can permit to have proper level of stock management by eliminating
over and under stocking which aid in having good performance by reducing cost associated with
it. In addition to this maintaining good relationship with suppliers via having ability to decline
cost through eliminating irrelevant incurring of expenses can help firm to improve performance,
gaining the diverse method for financial sourcing can provide assistance in meeting objective of
higher profitability via attracting greater customers (Cho, Chung and Young, 2019). There
should be much attention is given on having such techniques that is concerned with having
proper capital stricture so that associated with it so that greater flexibility to coordinate with
prevailing situation can be done. In addition to this, maintaining and offering proper
understanding of credit policy can help in clearing the terms with related parties which can
provide assistance in improving the performance of the mentioned enterprise. Conducting market
research can as well assist in achieving the proper information about the trending techniques like
software for managing the overall processing that can lead to make greater strategic decision.
The other course of the action which can be used by the firm for having better
performance involves selling obsolesce assets so that proper level of liquidity can be generated.
This can permit firm to have updated technology to enhance it financial performance so that
better outcomes can be received. There is lack of management for the current assets which
leading to have higher ratio and reducing capacity to gain capital expenditure. On the basis of
this it can be recognized that firm should concentrate on building good proportion so that
boosting financial condition in market can become possible. The other practices like having
proper financial planning & forecasting method so that unforeseen situation can be recognized.
Budgetary control tools can permit in proper allocation, managing and controlling of resources
which can increase performance of firm. Having management systems like price optimization,
job costing and cost accounting can reducing the burden of managing irrelevant aspects by
avoiding them and implementing quality performance.
On the basis of this, it can be interpreted that there are different form of the procedures
which can be sued by the particular organization to gain competitiveness. The competitiveness

can be achieved in reducing cost, increasing profitability, having economies of scale, good
relationship with stakeholders, elimination of irrelevant barriers, etc.
CONCLUSION
By summing up this report, it has been articulated that financial management ensures
optimal allocation of funds. This in turn also helps in driving or fostering economic growth and
stability within an organization. It can be seen in the report that ratio analysis tool helps in
evaluating company’s growth and position from several perspectives. Besides this, it can be
inferred that by preparing financial statements business unit can get information about
profitability, assets, liabilities and cash position. It can be concluded from the evaluation that
firm needs to take significant measures for performance improvement.

REFERENCES
Books and Journals
Brigham, E. F. and Daves, P. R., 2021. Intermediate financial management. Cengage Learning.
Brigham, E. F. and Houston, J. F., 2021. Fundamentals of financial management: Concise.
Cengage Learning.
Cho, S.J., Chung, C.Y. and Young, J., 2019. Study on the Relationship between CSR and
Financial Performance. Sustainability. 11(2). p.343.
Finkler, S. A., Calabrese, T. D. and Smith, D. L., 2022. Financial management for public,
health, and not-for-profit organizations. CQ Press.
Guerard, J. B., Saxena, A. and Gultekin, M., 2021. The Annual Operating Statements: The
Income Statement and Cash Flow Statement. In Quantitative Corporate Finance (pp. 53-77).
Springer, Cham.
Jagadish, A. D. and SHARMILA, J., 2021. IMPACT OF PROFITABILITY ON THE
BUSINESS, CASH FLOW AND PROFITABILITY. PalArch's Journal of Archaeology of
Egypt/Egyptology. 18(08). pp.4425-4434.
Kembauw, E. and et.al., 2020. Strategies of Financial Management Quality Control in
Business. TEST Engineering & Management 82. pp.16256-16266.
Online
Ways to Improve Your Company Financial Position. 2022. Online. Available through:
<https://www.rivierafinance.com/finance-blog/how-to-improve-your-businesss-financial-
position/>
The four basic financial statements. 2022. Online. Available through: <
https://www.accountingtools.com/articles/the-four-basic-financial-statements.html >.

APPENDIX