Importance of Financial Management for Business Management Students

This report discusses the concept and importance of financial management, financial statements, and the use of ratios in financial management. It also includes a financial analysis of a case organization and processes that can be used to improve financial performance. The report is relevant to BSc (Hons) Business Management with Foundation students taking BMP3005 Applied Business Finance.

BSc (Hons) Business Management with Foundation
BMP3005
Applied Business Finance
The concept and importance of financial
management and the processes businesses
might use to improve their financial
performance
Submitted by:
Name:
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Contents
Introduction p
Section 1: Definition and discussion of the concept and
importance of financial management p
Section 2: Description and discussion of the main financial
statements and explain the use of ratios in financial management
p
Section 3: Using the template provided p-p
Completing the Information on the ‘Business Review Template (Ensure
that you display your calculations for this detail)
p
Using Excel producing an Income Statement for the Sample Organisation
(see Case Study). This should be included within your appendices
p
Using Excel completing the Balance Sheet p
1

Using the Case study information describing the profitability, liquidity and
efficiency of the company based on the results of ratio analysis
p
Section 4: Using examples from the case study describing and
discussing the processes this business might use to improve their
financial performance p
Conclusion p
References
Appendix p
2

Introduction
Financial management involves decision making with regards to the financial
resources of the business in order to ensure better operational efficiency. There are four
elements within the concept of financial management that is, planning, controlling, directing
and organizing and the last one is the decision making (Brigham and Daves, 2018).
Accordingly, within this report the discussion will be done with respect to different aspects of
the financial management such as the report will highlight the definition, concept and
importance of financial management. Also, various financial statements that are usually
prepared by modern businesses will be discussed along with stating the use of ratios from the
financial management perspectives. In the next section of this report, financial analysis of the
case organization will be done in terms of its profitability, liquidity and efficiency. At last,
various processes will be discussed with the help of which business financial performance
could be improved.
Section 1: Definition and discussion of the concept and
importance of financial management
Definition of financial management
“According to S.C. Kuchal, financial management is considered to be the most important
function performed within every organization which deals with the acquisition and effective
utilization of funds for the betterment of the business. Furthermore, it involves application of
general management principles over the financial resources of the business.
Concept of financial management
The concept revolves around decision making with regard to three major affairs of the
business and decisions related to it that is, investment decision, financing decision and
dividend decision (Mishra, 2018). A business in need of funds and higher profitability need to
answer the following three questions, and that is what reflects the concept of financial
management.
Investment decision (Where to invest the acquired funds?): This decision involves choosing
the asset within which the business should make investment and accordingly, efficient
allocation of limited funds available with the business is done through taking such decisions.
The decisions are made on the basis of rate of return from investment and cash inflows that
the investment is expected to generate over its life. This is done to ensure higher profitability
of the business through selecting projects with comparatively high potential.
3

Financing decision (Where to get the funds for making investment and running day to day
business operations?): This decision aims for opting those sources for raising funds at a
favorable term as best as possible, so that risks and costs associated with the financial aspects
of the business could managed well (Anoos and et.al., 2020). Accordingly, here sources of
finance are selected from which long term funds can be raised and in turn the decision is also
known as decision for capital structure of the business.
Dividend decision (How much of the earnings must be distributed amongst the shareholders
in order to keep them satisfied?): Here decision is made regarding how much or how
frequently the business should opt for distributing its profits amongst the shareholders as a
return for their investment in the form of dividend. This decision has great impact over the
availability of funds for future needs of the business to finance growth and expansion related
activities. Therefore, two elements form part of this decision that is, amount to be retained
and amount to be distributed out of the business profits.
Importance of financial management
The key to business success is nothing but an appropriate financial management and
for this, owners and managers should never overlook the importance of financial
management. It allows for investment planning, its funding and monitoring of expenses
through budgets.
The following are certain points reflecting the importance of financial management:
 It helps in financial planning which allows for deciding how much capital should be
obtained from which sources. Accordingly, proportion of equity and debt with the
capital structure are determined (Mbaka and Namada, 2019).
 It helps in enhancing organizational efficiency through reduction in production
delays, cost of externally acquired funds by using it in a proper way through best
financial management practices in place.
 It outlines the path through which profitability of business can be maximized along
with minimizing costs which in turn helps in enhancing the wealth of shareholders.
Section 2: Description and discussion of the main financial
statements and explain the use of ratios in financial management
There are commonly three types of financial statements that modern businesses generally
prepare, which are as follows:
4

Income statement: Here all the expenses incurred and income earned for the period under
consideration are listed out and accordingly, the difference between the two helps in
determining whether the business is earnings profit or incurring loss. Accordingly, investors
are able to determine business profitability through this statement to ensure whether they
would be able to get their desired returns or not (Martin, Keown and Titman, 2020).
Balance sheet: Through this statement, financial position of the business can be determined
by getting information regarding the book values of business assets, liabilities and equities.
Therefore, it is generally referred to as a snapshot of what business owes and owns on a
reporting date. Investors use this statement in an attempt to evaluate the financial health of the
business in which they are desiring to make investment.
Cash Flow Statement: This statement provides overview of business’s liquidity by stating
different activities associated with operation, investment and financing of the business. At the
end of the statement net decrease or increase in cash flows are shown along with the closing
cash balance at reporting date which indicates liquidity of the business.
Uses of ratios in financial management
1. With the help of ratios, performance of the business can be evaluated against their
competitors through which the market position of the business can be determined in
terms of weaknesses, strengths and competitive advantage (Brigham and Daves,
2018).
2. Ratios are used for understanding the trend existing within the financial performance
of the firm from a number of reporting periods. Accordingly, future performance of
the firm can be predicted along with gaining insights over financial turbulence.
3. Ratios depicts operational efficiency of the business through which utilities of assets
and liabilities of the business can be understood well.
Section 3: Using the template provided:
Completing the Information on the ‘Business Review Template (Ensure
that you display your calculations for this detail)
Particulars
2016
£' 000
2015
5

£' 000
% change
Turnover derived through continuing operations
189711
179587
5.60%
Profit for the financial year
43057
18987
126.77%
Shareholder's equity
83803
63057
32.90%
Current assets as a percentage of current liabilities
54.72%
304.00%
-82.00%
Customer satisfaction
4.5
4.1
10.00%
Average number of employees
649
618
5.00%
Gross profit:
Sales Turnover = 189711
Cost of sales =
Material cost + Production cost + Labour cost
= 42597 + 15231 + 50758 = 108586
Gross profit = Turnover – Cost of sales
= 189711 – 108586
6

= 81125.
Net profit
Gross profit – Overheads
Overhead cost = Administrative expenses + Other operating costs + Interest
= 13751 + 22374 + 1943 = 38068
Net profit: 81125 – 38068
= 43057.
Increase in Net Profit in year 2016:
= 43057 – 18987 / 18987 * 100
= 126.77%.
Shareholder's equity reflect the fact that there is an increase of 32.9%. On the other hand
absolute increase in the shareholder's equity is calculated:
= 63057 / 100 * 132.9
= 83803.
Quick ratio
Current assets - inventories / Current liabilities
= 84349 – 28571 / 37928 = 55778 / 37928
= 1.47 times.
Current ratio
Current assets / Current liabilities
= 84349 / 37928
= 2.22 times.
Using Excel producing an Income Statement for the Sample Organisation
(see Case Study)
This is included within appendix
7

Using Excel completing the Balance Sheet
Balance sheet as at 31 December 2016
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 1,15,719
Non Current Liabilities
Bank loans and overdrafts 16,506
Other Liabilities 7,304
23,810
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Provisions for liabilities 8,094
Net assets 83,815
Capital and reserves
Called up share capital 39,436
Reserves 1322
Retained earnings 43,057
Total equity 83,815
Using the Case study information describing the profitability, liquidity and
efficiency of the company based on the results of ratio analysis
Profitability of the company
Ratios Results
Gross Profit margin 40.00%
Net profit margin 20.00%
The gross profit of the company is identified in current year is 40%. Net profit on the
other hand determined as 20%. Acquisition of business held by extinguishers as on May 1st
2015 could result into the increased profitability of the organisation. Acquisition could
support the organisation to boost its profit margin that would eventually favour the
organisation to support the better amount of business growth and development possibilities in
respective target market.
Liquidity analysis of the company
Ratios Results
Current ratio 2.22
Quick ratio 1.47
Current ratio of the company is identified as 2.22 and o the other hand quick ratio is
determined as 1.47. Current ratio of the company is very strong as it is more than the idle
current ratio that is 2. The current position of the company could support the venture in
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approaching the current asset that is more than twice as compare to the current liabilities hold
by the organisation (Osadchy and et.al., 2018). The quick ratio of the organisation is more
than 1 that is an idle quick ratio. It mean that company is in a very strong position to meet up
all its quick liabilities and also thereafter dealing with quick liabilities company would carry
the enough funds that would go for the immediate requirements of the business.
Efficiency analysis of the company
Ratios Formula Results
Asset turnover ratio Turnover for the year / Total
assets
189711 / 153647 = 1.23
Accounts receivables
collection period
Account receivables /
Turnover for the year * 365
26367 / 189711 * 365
= 50.73 or 51 days.
Company is not able to utilise its assets properly. Current asset turnover ratio is
determined as 1.23 which is lower than 2.5. This indicate that the organisation could not
utilise its assets appropriately. Account receivable turnover days on the other hand is
identified as 51 days.
Section 4: Using examples from the case study describing and
discussing the processes this business might use to improve their
financial performance.
 Company should focus on further improving its liquidity. In order to improve the
liquidity situation overhead costs can be reduced. Better relationship with the
suppliers of company can support the organisation to eliminate the overhead cost at a
mass level. Along, with that giving discounts and offers, would result into the earlier
payment that will further allow the organisation to improve and strengthen the
liquidity position of the organisation. Company should also focus to lower the
dependency toward external sources of financing (Nasution, 2019). This will allow
the organisation to reduce the cost of borrowing that would eventually decreases the
overhead cost. Liquidity is a strong requirement of every business and with proper
analysis and evaluation regarding the requirements and cash and liquidate resources
organisation can effectively monitor and manage its show term obligations that will
further improve the effectiveness and efficiency of operations perform by the
business.
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 All such assets that are not any more efficient enough to produce the suitable outcome
should be sold. This would allow the company to reinforce the assets in the
organisation so that better level of productivity can be achieved by the organisation
(Pambreni and et.al., 2019). Company's asset turnover ratio is low that require to
improve by the organisation. Scrapping the ineffective assets will certainly create a
change in the organisation's effectiveness to generate profits in business.
 Company can also offer better pricing strategy that can allow the organisation to offer
its products at more affordable rate (Centobelli, Cerchione and Singh, 2019). IN
market the competition is aggressive which require the proper competitive strategy
related to pricing of product. Company should focus on reinforcing its pricing practice
that would allow the organisation to attract more number of potential customers
towards buying product and services offer by the organisation.
 Company should focus on utilising the equity and retained earnings. Focusing more
on these resource will reduce the cost of borrowing funds in the business (Ajibola,
Okere and Qudus, 2018). Management should not focus more on appropriating to the
external sources of generating the funds in business.
Conclusion
From the above report it has been concluded that the performance of case
organization in the current financial year that is, 2016 has been improved in terms of
profitability but the liquidity of the business has degraded much as compared to previous
years which they could improve by framing attractive credit policies for their accounts
receivables. Furthermore, efficiency of the business needs improvement in terms of better
asset utilization and credit policies to get outstanding dues earlier.
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References
Ajibola, A., Okere, W. and Qudus, O. L., 2018. Capital structure and financial performance
of listed manufacturing firms in Nigeria. Journal of Research in International
Business and Management. 5(1). pp.81-89.
Anoos, J., and et.al., 2020. Financial management of micro, small, and medium enterprises in
Cebu, Philippines. International Journal of Small Business and Entrepreneurship
Research, 8(1), pp.53-76.
Brigham, E. F. and Daves, P. R., 2018. Intermediate financial management. Cengage
Learning.
Centobelli, P., Cerchione, R. and Singh, R., 2019. The impact of leanness and innovativeness
on environmental and financial performance: Insights from Indian
SMEs. International Journal of Production Economics. 212. pp.111-124.
Martin, J. D., Keown, A. J. and Titman, S., 2020. Financial management: principles and
applications. Prentice Hall.
Mbaka, A. and Namada, J., 2019. Integrated financial management information system and
supply chain effectiveness.
Mishra, S., 2018. Financial management and forecasting using business intelligence and big
data analytic tools. International Journal of Financial Engineering, 5(02), p.1850011.
Nasution, D. A. D., 2019, August. The Effect of Implementation Islamic Values and
Employee Work Discipline on The Performance of Moslem Religious Employees at
Regional Financial Management in the North Sumatera Provincial Government.
In International Halal Conference & Exhibition 2019 (IHCE) (Vol. 1, No. 1, pp. 1-
7).
Osadchy, E. A. and et.al., 2018. Financial statements of a company as an information base for
decision-making in a transforming economy.
Pambreni, Y. and et.al., 2019. The influence of total quality management toward organization
performance. Management Science Letters. 9(9). pp.1397-1406.
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Appendix:
Income Statement
2016
Turnover 3 18971
1
Less cost of sales:
Material Cost 42597
Production Cost 15231
Labor Cost 50758
10858
6
Gross profit 81125 GP %
=
0.4
Less Expenses:
Administrative expenses 13751
Other operating overheads 22374
Interest 1943
Total Overheads 4 38068
Profit/(loss) for the financial year 43057 NP
%=
0.2
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