Importance of Financial Management for Business Operations

This report explains the concept and importance of financial management, financial statements, and ratios. It also provides a business review template and processes that businesses can use to improve their financial performance. The subject is relevant to finance and accounting courses in colleges and universities. Get study material and solved assignments on Desklib.

Importance of Financial
Management

Contents
INTRODUCTION...........................................................................................................................................3
SECTION 1....................................................................................................................................................3
Explaining concept and importance of financial management................................................................3
SECTION 2....................................................................................................................................................4
Describing the main financial statements and use of ratios in FM.........................................................4
SECTION 3....................................................................................................................................................5
Business review template........................................................................................................................5
2. Income statement...............................................................................................................................6
3. Balance Sheet......................................................................................................................................7
4. Ratio analysis of the following information.........................................................................................8
SECTION 4..................................................................................................................................................10
The processes that businesses might use to improve their financial performance...............................10
CONCLUSION.............................................................................................................................................12
REFERENCES..............................................................................................................................................13

INTRODUCTION
A company's business finance is the revenue it needs and collects in order to run its
activities efficiently. It is primarily necessary in any form of business to execute its operations,
financial, and marketing tasks. The current example situation will highlight the fundamental
notion of financial management as well as its significance (Sun, Shi and Zhang, 2019). The
report will go through the key accounting records that a firm generally generates at the end of the
year, as well as the use of ratios in FM. In addition, the report will include revenue and balance
sheet statements, as well as competitiveness, stability, and profitability ratio. Finally, the report
will highlight strategies that businesses may implement to enhance their financial performance.
SECTION 1
Explaining concept and importance of financial management
The process of planning, managing, and controlling financial activities is referred to as financial
management. It is concerned with making judgments about collecting finances at the lowest
feasible cost and employing them in the best conceivable ways. FM is interested in gathering a
consistent flow of funds, offering adequate returns to its shareholders, and developing a healthy
and stable capital structure.
• It calculates the amount of finance necessary by a firm to perform effectively and efficiently.
• FM identifies funding sources that may be used to raise capital, such as shares, convertible
notes, securities, lengthy loans, and so on.
• Financial management determines the optimal capital base, i.e. the proportion of borrowed
finance and owners' money (Handayani and et.al, 2021).
• It ensures that the company's monetary costs are properly used. It is accomplished by
estimating the risk and return connected with a certain capital asset.
• Another advantage of FM is that it enables cost management by meticulously allocating energy
in various budgeting and taking corrective steps when deviations occur.

• It also offers insight on how to utilise excess or profit created by the organisation. They
determine whether to give extra cash to investors as a dividend or to reinvest it in the firm.
• Furthermore, it manages the firm's cash flows by tracking operations that resulted in cash
inflows or outflows. This ensures that there is enough cash on hand to run the firm.
SECTION 2
Describing the main financial statements and use of ratios in FM
There are four primary measures of financial accounts that make a significant contribution
to obtaining a range of various sorts of information, resulting in a greater capacity to make
decisions. It consists of an income statement, a cash flow statement, a change in equity statement
and a balance sheet. Every statement plays a vital role in presenting various types of facts in
order to attain complete transparency (Azlina and Hasan, 2017).
Income Statement: It is the report that discloses the organization’s productivity. It assists the
Company with selling and afterwards deducts the expenditures for the specified term. This aids
the computation of the net earnings in this report. The earnings per share of the corporation are
determined in the company's income statement, which is made public.
Balance sheet: This report aids in the analysis of the business's financial status for the specified
time period. It is the data that is aggregated for the broader category of resources, liabilities, and
equity. Those balance-sheet column headings are classed as the order of the business's liquidity.
It is often referred to as the crucial document that demonstrates the certainty of the accounting
records.
Cash flow: This report highlights the firm's influx of money and outflow, as well as the
organization's variety of business activities throughout that time period. The cash flow statement
illustrates the operational, investment, and financial operations.
Ratios are a sort of calculation was using to evaluate the feasibility and profitability of a
company's financial accounts. They cover a wide range of calculations. The following are some
examples of how numbers are used in managing finances:
• Aids in prices varies Ratios are especially useful in providing a firm with a comparative
viewpoint, which may also assist in making based control modifications. Managers and

merchants investigated this in order to link previous year's results to current year's success
(Yoshino and Taghizadeh-Hesary, 2018).
• Helpful in decision planning: Employees are eager to assist management in developing proper
judgment and implementing relevant commercial strategies. Researchers make assumptions
based on them since they provide vital information about the profitability of firms.
• Assists forecasting and planning- They were especially beneficial in fiscal management and
also estimating future situations and duties by estimating the duration of time. These assist in
providing sufficient understanding to proprietors and clients in order for them to create their
spending plan. This gives outside organizations with an investment in the organisation a greater
understanding of the firm's financial situation (NGUYEN and HA, 2021).
SECTION 3
Business review template
The Net Profit for the year 2016, is £43057 (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 + 27.3 %
Shareholder’s equity 83815 63,057 +32.9%
Current assets as % of current liabilities 222.3 % 304% -82%
Customer satisfaction 4.5 4.1 +10%
Average number of employees 649 618 +5%

Throughout the year, the changeover from trying to grow operations was 5.6 percent. It was
apparently due to the purchase of the firm on May 1, 2015, which was counted as contributions
for the whole year in 2016.
Net Profit = £43057 Gross Profit = £81125
The increase in net profit in 2016 was 27.3 percent yearly.
This resulted in a 32.9 percent rise in total shareholders ’ equity of £20758.
As a result, the subsequent year, the firm's quick ratio was 1.47, computed by dividing its current
assets subtracting stock by its current liabilities.
In that year, the company's current ratio was 2.22, which was derived by dividing current assets
by current liabilities.
2. Income statement
Attached in appendix

3. Balance Sheet

4. Ratio analysis of the following information
Ratio analysis is a quantitative tool for assessing a company's financial position, operating
efficiency, and revenue. The below are the calculations for this company's monetary metrics.
Liquidity ratio:
The liquidity ratio is made up of two ratios: the current ratio and the quick ratio. This
company's existing ratio is 2.22, which is quite favorable compared to the idea current ratio of 2.
This company has a current ratio that is above average. This indicates that the organisation seems
more than sufficient to meet its immediate commitments. This firm's quick ratio is 1.47, which is
higher than the ideal quick ratio, which reflects the flexibility of resources and the company's
ability to transfer money (Bärtl and Krummaker, 2020).
Efficiency Ratio:

The efficiency ratio is an assessment of a business's capacity to generate income from its
assets. The asset turnover ratio, which is 3.80 for this firm, is somewhat smaller than the concept
ratio, which indicates restocking rates and revenues and aids in maintaining the product in a
specific way. This firm's asset turnover ratio is 0.62, which is quite low; the firm should strive
for a greater fixed asset turnover ratio, which will demonstrate the operational productivity in
generating sales or income from investments (Abdu and et.al, 2018).
Profitability Ratio:

The profitability ratio displays the level of profit earned in relation to the group's overall
sales. This firm's gross profit ratio is 42.76 percent, which is significant and implies that the
business is making money. This organisation should keep the same processes running so that it
may create durability in the profits it is making. This firm's profitability ratio is 22.70 percent,
which is likewise exceptionally high when compared to its gross profit ratio. This means that the
organisation is profiting at this rate on the money generated.
SECTION 4
The processes that businesses might use to improve their financial performance
From the above analysis it is clear that the business must improve the financial
performance of the company to improve the overall operations of the business. The company's
liquidity position is quite good as both the current ratio and quick ratios are ideal. The different
processes that business might use to improve the performance are-
To increase the profitability, the organisation has to focus on improving the profitability
ratios. The company needs to increase its revenue by reducing the direct costs. The direct costs
can be controlled by eliminating unnecessary expenses of the company. They can also be
reduced by negotiating better prices of the products by offering discounts. The company should

control the overhead expenses also through various ways such as benchmarking, comparing its
operations with other company's operations (Husain, T. and Sunardi, N., 2020).
The company should aim to boost revenue in order to enhance efficiency ratios. The
firm's asset turnover ratio is great, but the fixed charge coverage ratio may be enhanced by
lowering fixed asset expenditures and disposing those assets which have become obsolete. It can
also be boosted by renting assets rather than buying new ones. The organisation should examine
how the asset may be leveraged to motivate employees. Furthermore, the firm should concentrate
on debtor recovery. It can be accomplished by entrusting the collection of accounts payable to a
collection company. The delivery method should not be sluggish since it would cause delays in
getting items to clients, which will lead to termination payment of debtors. The firm may invest
in technological trends to simplify the revenue cycle, which would increase sales and improving
the firm's efficiency levels (ALMAHADIN and et.al, 2021).
To boost the organization's market efficiency, the corporation should aim to decrease
credit and personal debt. This might be done in order to make advance loan payments or
restructuring such obligations. When entering into any new arrangement, the corporation must
conduct thorough investigation. To improve revenue, the business should provide its providers
with a variety of financial methods. Whenever there is an overabundance of want, the
corporation should raise the price of its items, and vice versa. This price increase and fall method
is best suited to increasing the firm's performance and effectiveness (Cai, 2018).
Companies can raise funds via donations because there is no payment of interest required.
If any unique or new items are to be offered, this is an effective option to raise funding. The
organisation should improve its marketing talents through numerous tactics including social
media marketing, for example. There are a range of measures that may be done to increase
efficiencies in order to gain more profit. Measures that may be taken include decreasing cost
units, controlling excess capacity in operational regions and channels, optimizing the cost of
offering excellent service, and increasing the frequency of fulfillment domestically for
consumers (Robina Ramírez, 2017).
Essentially, the firm's situation is solid, and the corporation should concentrate on increasing
revenue, which would inevitably raise earnings.

CONCLUSION
To summaries the study, cash or money plays an significant role in the performance of
any business since businesses function with finance obtained and produce profit in order to
remain successful in a fierce competition. It may also be indicated that financial selection
depends by organizations provide essential information which can be used by the firm and third
parties. Furthermore, it may be stated that ratio analysis gives more detailed information about
just a company's situation and productivity. It assists businesses in making inter- and intra-firm
comparisons easier. At the conclusion of the study, numerous recommendations are developed to
increase the prevailing success of the companies, like utilizing inactive total assets in
constructive ways, trying to control unnecessary costs to increase net profit, and shortening the
accounts receivables to handle cash flow, among other things.

REFERENCES
Books and Journal
Sun, Y., Shi, Y. and Zhang, Z., 2019. Finance big data: Management, analysis, and
applications. International Journal of Electronic Commerce. 23(1). pp.9-11.
Handayani, S. and et.al, 2021. Financial Feasibility of Cattle Breeding Partnership in South
Lampung Regency. International Journal of Accounting & Finance in Asia Pasific
(IJAFAP). 4(3). pp.1-8.
Azlina, N. and Hasan, A., 2017. The Effectiveness of Village Fund Management (Case Study at
Villages in Coastal Areas in Riau).
Yoshino, N. and Taghizadeh-Hesary, F., 2018. Remedies for mitigating Asian SMEs’ access-to-
finance difficulties. In Routledge Handbook of Banking and Finance in Asia (pp. 371-
385). Routledge.
NGUYEN, Y. H. D. and HA, D. T. T., 2021. The effect of institutional quality on financial
inclusion in ASEAN Countries. The Journal of Asian Finance, Economics and
Business. 8(8). pp.421-431.
Bärtl, M. and Krummaker, S., 2020. Prediction of claims in export credit finance: A comparison
of four machine learning techniques. Risks. 8(1). p.22.
Abdu, M. and et.al, 2018. Can Islamic banking and finance spur financial inclusion? Evidence
from Sub-Saharan Africa. CBN Journal of Applied Statistics. 9(1). pp.77-104.
ALMAHADIN, H. A. and et.al, 2021. The Effect of Banking Industry Development on
Economic Growth: An Empirical Study in Jordan. The Journal of Asian Finance,
Economics and Business. 8(5). pp.325-334.
Cai, C. W., 2018. Disruption of financial intermediation by FinTech: a review on crowdfunding
and blockchain. Accounting & Finance. 58(4). pp.965-992.
Robina Ramírez, R., 2017. Teaching ethics through court judgments in Finance, Accounting,
Economics and Business.