Importance of Financial Management

This article discusses the concept and importance of financial management, financial statements and ratios, business performance review, ways to improve business performance and more. It also includes a section on business performance review, ways to improve business performance, and references. The subject matter is relevant to finance and accounting courses in universities and colleges.

Importance of
Financial
Management

Table of Contents
INTRODUCTION...........................................................................................................................1
SECTION 1......................................................................................................................................1
Concept and importance of financial management................................................................1
SECTION 2......................................................................................................................................1
Financial statements and use of ratios....................................................................................1
SECTION 3......................................................................................................................................3
Business performance review.................................................................................................3
SECTION 4......................................................................................................................................4
Ways to improve business performance.................................................................................4
CONCLUSION................................................................................................................................4
REFERENCES................................................................................................................................5
APPENDIX......................................................................................................................................6

INTRODUCTION
Finance in the business refers to the monetary terms and the things that are related to the
finance of the business that company uses to achieve its aims and objectives. Finance is essential
for any organisation, from the purchase of raw materials to the delivery of goods and services to
customers (Asongu and Odhiambo, 2018). Business finance refers to the acquisition of funds for
the purpose of meeting a company's needs. This provides finances for working capital
requirements, capital requirements, and monetary asset diversification. Management of finance
and its role in the organisation is discussed below in along with the financial statements and uses
of ratios in effective management of finance in the business.
SECTION 1
Concept and importance of financial management
One of the most important concepts in company is financial management. It is the
component of planning that comprises an accurate estimate of the organization's income,
expenses, and profitability. The following is an explanation of the notion of financial
management:
Tax planning: Tax planning is an important job that is carried out to ensure the smooth
operation of a business. Effective tax preparation can help you save money by lowering your
payroll taxes, lowering your income tax liability, and so on (Huang and Wang, 2018).
Budgeting is a crucial concept since it aids in the development of a yearly master budget
that includes income and cost predictions, a cash flow statement, a profit and loss statement, and
a balance sheet.
Importance
Financial management aids in assessing the needs of finance of the firm and further helps
the organisation in financial planning. It plays an important role in business and also aids in the
promotion of a company. With the support of powerful financial control devices like budgeting
control, cost profit analysis, and ratio analysis, it also aids in enhancing profitability (Botta,
2020). As of today, financial management is also known as company finance or corporate
finance, and it aids in promoting and mobilising individual and corporate saving. It also
contributes to the company's total value.
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SECTION 2
Financial statements and use of ratios
Income statement
This is considered as one of the most important statements since it depicts the company's
financial success for a certain accounting year. This is also called a profit and loss account since
it displays the amount of profit and loss incurred was reported in a given fiscal year (Rea and et.
al., 2019). All of the firm's incomes are credited, and the total of expenditures is debited; if the
total of credit is greater than the total of debit, the company makes a profit in that year; if the
total of debit is greater, the company makes a loss in that year. The income column comprises
dividends, interest, and rent generated, as well as discounts and profit on investment sales,
whereas the expenditures column in the income statement consists of bad debt, rent, advertising,
commission and all such expenditure.
Balance sheet
Balance sheet is one of the major financial statement in the business that helps in
determining the value of assets and liabilities in the firm. A balance sheet consists of liabilities,
assets and shareholder's funds, and it displays what will be left over after the organisation clears
all the liabilities and returns the shareholder's money (Zhang and et. al., 2020). The total of the
two divided columns, which represent the company's assets and liabilities, should be equal.
Assets = Liabilities + Shareholder's fund
All forms of assets are included in the Assets column. Current, non-current, and even intangible
assets like goodwill are all considered. The Liabilities portion of the balance sheet lists all of the
company's obligations, both short-term and long-term. Because the net profit or loss is also
stated in this account, the balance sheet is created following the income statement at the
conclusion of the financial year.
Cash flow statement
This statement is created to help you understand your company's cash flow. This
statement aids the organisation in determining what type of activity generated revenue or
expense for the given fiscal year. This account tracks three different sorts of activities:
operations, investing, and finance. The operational operations report any income or expenditure
in the organization's day-to-day or short-term operational activities (Philippas and Avdoulas,
2020). Any cash flow generated by the organisation as a result of a change in long-term assets or
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investments, such as the acquisition of some assets or capital expenditure, is accounted for in the
cash flow as investing activity. The cash flow statement's financial operations part comprises
debts paid and money raised through the issuance of shares. Taking these three operations into
account, the company's net increase or decrease in cash and cash equivalent in each financial
year is calculated.
Ratios
Ratios in the business are calculated to provide insight into the operational liquidity and profit
status of the enterprise. Profitability: This is a metric that is used to assess a company's ability to earn profit in a
given fiscal year. Gross profit ratio, operational profit ratio, net profit ratio, and return on
capital employed are the four types of profitability ratios. Liquidity: This is calculated to determine the company's financial indicators, such as
whether the corporation can pay off its obligations by selling assets or not. The current
and quick liquidity ratios are the two most common types of liquidity ratios (Arifin,
2018). These ratios evaluate whether a corporation is in excellent liquidity or not, which
is why an ideal current ratio is 1 or above, indicating that the company has the resources
to pay off its liabilities.
 Efficiency: This is done and evaluated in the company in order to assess the ability to
earn money from its investments. This is also known as turnover ratios, and there are four
different types of efficiency ratios: asset turnover ratio, accounts payable ratio, inventory
ratio and recievable ratio. (Pandey and et. al., 2020). They are measured in terms of days,
which helps the organisation in determining the number of days it will take to recover
money from its debtors.
SECTION 3
Business performance review
Business profits: In the year 18,987 at the conclusion of the 2015 fiscal year to 43,057 at
the end of the 2016 fiscal period the increase is of 127% percent rise. It denotes the respective
firm has faced period of significant growth operating efficiently. 42.8% is the identified gross
profit margin, and the ratio analysis has showcases the total margin of profit for the firm resides
at 22.7%. Aside from that, margins are utilised for comparing, as it is noted that for individual
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sale of 1 great British pond, £42.8 is made, which is without considering the no-operating
expenditure of net profit. (See the appendix for more information)
Business liquidity: According to the conclusions, the company has the capacity of ensuring
completion of obligations related to short-time period. According to the currently owned assets
and currently present liabilities, as of now the firm is facing solvency with £ 2.22 of current
possessions to £1 of current obligations. Furthermore, the organisation is revealed to be liquid
when inventory is removed, with 1.47 great British pounds to completely cover the
responsibilities of the firm. Furthermore, in 2016, the fraction of recent obligations which is not
representative of loss of liquidity of the company declined. The increase in employee numbers
from 618 to 649, as well as a 10% improvement in customer satisfaction, shows that the
company is spending earned cash and sustaining its growth. (See the appendix for more
information)
Business efficiency: The company earned £2.26 for every £1 invested, meaning the
investment of financial resources is made in an enterprise which is creative and providing
successful outcome with high return on investment equalling to 226%. In this scenario, the
company normally has limited time period produce specific sock compare the number to other
businesses in the same sector to see if it is helpful or not.
In addition, businesses must pay credit providers limited time period of 72 days or make the
collection directly from consumers in the time period of 54 days. The reason for this is it helps
the company manage and maintain control over cash flow and has positive impact on financial
condition of the firm. As a result, the business will be able to pay its bills for a bit longer, which
is always a good thing. (See the appendix for more information)
SECTION 4
Ways to improve business performance
The following are some suggestions for improving business performance:
 The process of identifying all clients who require the product or service. The company
may use a CRM platform to locate new customers based on their search and purchase
history, and then communicate with them (Morgan and Trinh, 2019).
 The quality of products and services could be improved by spending time preparing and
listening to current customers.
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 Minimizing sales costs by focusing more on relationship selling in order to win business
on a consistent basis.
 A strong business presentation can help you improve your company's performance. These
could include imparting wisdom in order to pique the audience's interest.
 Creating a productive organisational culture in which employees like coming to work,
feel safe, and collaborate well.
 Employees who are talented and motivated can help the company succeed. Employees
could be enticed by bonuses, pay, and other incentives provided by the company. This
would help its staff feel more connected to the company and motivate them to work hard
to attain their objectives (Çera and et. al., 2020).
 Risk management software could be used by the organisation to assist everyone work
collaboratively, track progress, and stay on task. It has the opportunity to save everyone's
time by eliminating the need to send and receive emails, as well as ensuring that progress
is tracked more efficiently.
CONCLUSION
As a result of the above debate, it has been determined that financial management refers to
the practise of managing an organization's financial activities. It enables the company's
performance level since numerous operations connected to finance are combined in appropriate
techniques such as revenue recognition, fixed asset management, and so on. It takes care of all
the pertinent financial facts associated with the organisation. It involves preparing financial
records which help make effective managerial decisions and gain efficiency for long time period.
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REFERENCES
Books and Journals
Arifin, A.Z., 2018. Influence factors toward financial satisfaction with financial behavior as
intervening variable on Jakarta area workforce.
Asongu, S.A. and Odhiambo, N.M., 2018. ICT, financial access and gender inclusion in the
formal economic sector: evidence from Africa. African Finance Journal, 20(2), pp.45-
65.
Botta, M., 2020. Financial crises, debt overhang, and firm growth in transition
economies. Applied Economics, 52(40), pp.4333-4350.
Çera, G and et. al., 2020. Financial capability and technology implications for online shopping. E
a M: Ekonomie a Management.
Huang, W.Q. and Wang, D., 2018. Systemic importance analysis of chinese financial institutions
based on volatility spillover network. Chaos, Solitons & Fractals, 114, pp.19-30.
Morgan, P.J. and Trinh, L.Q., 2019. Determinants and impacts of financial literacy in Cambodia
and Viet Nam. Journal of Risk and Financial Management, 12(1), p.19.
Pandey, A and et. al., 2020. Catch them young: Impact of financial socialization, financial
literacy and attitude towards money on financial well‐being of young
adults. International Journal of Consumer Studies, 44(6), pp.531-541.
Philippas, N.D. and Avdoulas, C., 2020. Financial literacy and financial well-being among
generation-Z university students: Evidence from Greece. The European Journal of
Finance, 26(4-5), pp.360-381.
Rea, J.K and et. al., 2019. “Being able to support yourself”: Young adults’ meaning of financial
well-being through family financial socialization. Journal of Family and Economic
Issues, 40(2), pp.250-268.
Zhang, W and et. al., 2020. Suspending classes without stopping learning: China’s education
emergency management policy in the COVID-19 outbreak.
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APPENDIX
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