Financial Management: Importance, Financial Statements, Ratios, and Improving Performance

This report discusses the importance of financial management, financial statements, ratios, and improving performance. It includes insights into profitability, liquidity, and efficiency of a company through ratio analysis. The report is divided into four sections and covers various aspects of financial management.

Financial
Management

Table of Contents
INTRODUCTION ..........................................................................................................................3
SECTION 1......................................................................................................................................3
Discuss the importance of financial management.......................................................................3
SECTION 2......................................................................................................................................4
Describe main financial statements and discuss the use of ratios in financial management......4
SECTION 3......................................................................................................................................7
By using the template provided...................................................................................................7
Complete the 'Business Review Template'.............................................................................7
Using Excel prepare an income statement..............................................................................7
Prepare balance sheet with the help of Excel.........................................................................8
By using the information discuss about the profitability, liquidity and efficiency of
company by using ratio analysis technique............................................................................9
SECTION 4....................................................................................................................................11
Discuss the process to improve the financial performance.......................................................11
CONCLUSION .............................................................................................................................11
REFERENCES..............................................................................................................................12
Appendix........................................................................................................................................13

INTRODUCTION
Financial Management refers to the process of handling accounting resources of firm by
analysing, controlling and interpreting the data related to finance and taking decisions which are
important for achieving organisational goals. It urges the management to prepare various
accounts and reports through which the performance and position of firm is evaluated by
external as well as internal parties (Shapiro and Hanouna, 2019). The report is divided into four
sections. The first part of report mentions about the importance of financial management. Second
division relates to the important accounting statements and use of ratios in managing them. Third
portion presents some reports along with examining the performance of company. Fourth
segment deals in the process of improving financial performance.
SECTION 1
Discuss the importance of financial management
It is one of the most important activity carried down by a business. It relates to the
process of calculating and managing the expenses, revenues, profits and movement of cash in an
organisation. This controls and directs the monetary resources of a firm in the direction of
attaining targets of the company. Financial management simply means the practice of controlling
the capital of a firm which helps it in becoming successful. This is generally related to the short
term planning of working requirements by focusing on current assets and liabilities. When all the
finances are managed properly, they ultimately helps in fulfilling long term vision of business in
the form of increased profits, reduced cost etc.
Importance of Financial management
 Maintaining enough supply of funds- It ensures that the firm is having enough supply
of funds through its daily operations can be operated smoothly. It focuses on creating an
optimum debtors and creditors turnover ratio which makes it sure that business has the
opportunity to use cash before making payment to its creditors. It helps in finding various
sources of funds which are less costly and are easily available to the company (Young
and Legister, 2018).
 Ensuring good return of investment- It is very important the funds invested by the
investors brings good results to the business as well as its shareholders. Managers of this
department finds out optimum level of investing opportunities which are profitable and

less risky. It also make sure that the funds are not implied on any sort of wasteful
expenditure as it negatively impacts the profit generation ability of business.
 Efficient utilization of funds- Management of capital simply means applying the
resources judiciously so that each penny of firm brings some profit for it. It helps in
identifying the assets which are bringing losses and those needs to be acquired for
increasing profitability (Keown and et.al., 2020). Financial management make it sure that
funds are not invested in any task which is expected to bring heavy losses to the
company.
SECTION 2
Describe main financial statements and discuss the use of ratios in financial management.
Financial statements refers to a written report which comprises of the summary of all the
accounting activities taken place during a particular accounting period. It provides a brief
information of the end balances of all expenses, incomes, assets and liabilities. There is a well
structured format of these reports which make there use easy and understandable for external as
well as internal parties.
There are mainly three type of financial statements which are discussed below:
 Balance Sheet- It is one of the most important financial statement which shows all the
assets, liabilities and equity held by company in a fiscal year and helps in recognising its
financial performances. It works on the formula of:
Assets = Liabilities + Shareholders Equity
According to the above equation, it is mandatory that the total of one side must be equal to the
balance of other side. This report can be presented in horizontal as well as vertical format as per
the choice of organisation and accounting rules working in the country. Both the sides are further
divided into two parts- current and non-current, on the basis of there term of use and liquidity
position. Long term assets and liabilities are generally for the time period of more than one year
and are useful for running daily operations of firm (Li and et.al., 2020). They cannot be realised
in cash in very short time. On the other side, short termed ones are normally and required to be
realised within fiscal year for the better growth of business. They occurs from daily operations of
firm. For example, cash, accounts receivables, payables etc.

 Income Statement- It is a summarized report of all the expenses incurred and income
earned by business while calculating the profits or losses generated by firm in a particular
accounting period. It can be quarterly, monthly or yearly. It is also referred as profit and
loss account. The basic formula used in this equation is:
Income = Revenue - Expenses
This statement is also divided into two parts according to the operations of business. Its first part
deals with the aspects which are directly related to the manufacturing of goods. It calculates
gross profit by subtracting cost of goods sold from sales of that period. This income is then
transferred to next portion of this statement (Lévy, Bouheni and Ammi, 2018). It ascertains the
net profit earned by business from all post production activities. A balance of all indirect
incomes and expenses are calculated which is further deducted from the gross profit. This net
earning is then considered for the calculation of distribution of dividends to various types of
shareholders.
 Cash Flow Statement- It acknowledges the flow of cash in company in a particular time
period, it may be monthly, quarterly, half yearly or annually. In other words, it is a brief
summary of the incoming and outgoing of cash and cash equivalents in the industry. The
main aim behind this report is to know that where the funds are being used and how able
the company is, in using its resources optimally. It complements various users of
financial statements in conducting study of balance sheet and income report. This
description is divided into three types.
◦ Operating activities- It deals with the activities which helps in generating cash for
the business by covering regular operations under it. This section is the most bulky
portion of this statement. It includes actions like cash sale of inventory, payments,
receipts of all kind of transactions related to daily operations of company (Pawlus and
et.al.,, 2020).
◦ Investing activities- It includes the flow of cash through investment sources. These
are generally long term activities like sale or purchase of fixed asset, loan given to
any vendor, acquisition of shares or debentures, change in the value of assets etc.
◦ Financing activities- It includes the all the sources of money which are acquired to
run the business smoothly. This involves, issue of shares and debentures, payment of

dividend and interest, taking loans from institutions etc. The repayment of stock or
long term debts is also considered in it.
All the above mentioned statements are really helpful for the organisations for
determining the health of the institution and presenting the data to the investment community.
There are number of techniques for examining the performance of corporation, but accounting
ratios are the most important tool as it can be used by internal as well as external users (Mi and
et.al., 2020).
Use of ratios in financial management
Accounting ratios means to create a relationship among the different values of balance
sheet and income statement for the purpose of analysing the position of business. They helps in
ascertaining its efficiency and profitability condition. The results of these ratios are used by
various users by comparing them with previous reports or with other competitive firms. Various
uses of these ratios has been discussed below:
 Tool for controlling performance- Management team can take the results of these ratios
as benchmark for next year which needs to be improved. By setting a standard, the
employees will generate there own understanding to improve there actions, so that the
desired results could be achieved. This will also helps the firm to identify the areas where
they can be flexible and which section demands utmost attention.
 For preparing future plans- It helps in interpreting the trend by examining the ratios of
last few years and analysing the way corporation is performing. Favourable movement of
these results helps in creating good image of company in eyes of external parties (Ganjali
and et. al., 2018). Also, the internal users can make there plans for improvement by
reviewing the results driven form them. For example, firm analysed that its profitability
ratios are decreasing due to over expenditure on advertisements, which are actually not
bringing any sort of results. So, this expense can be either aborted or reduced to a
particular extent.

SECTION 3
By using the template provided.
Complete the 'Business Review Template'.
Calculations are shown in appendix.
Using Excel prepare an income statement.
This is included in appendix

Prepare balance sheet with the help of Excel.

By using the information discuss about the profitability, liquidity and
efficiency of company by using ratio analysis technique.
Examining the position of firm
 Profitability ratio- It helps in ascertaining the profits earned by business at the end of a
financial year (Wang and et.al., 2019). This earning can be related to investment, general
operations of business, earnings on shares etc. In other words, it determines its capacity
to generate income from its revenue.
According to the above chart, it can be concluded that the profit earning ability of firm is
increasing. Gross profit earned by business has shown a minute downfall as compared to the
previous year. While, on the other hand, net income of company was very less in year 2015 but
in the year 2016, there is a big increase in this revenue. The reason behind this hike is that firm
has shown a great control on its indirect expenses. This means the organisation is taking serious
actions for improving its profitability index.
 Liquidity ratio- These ratios helps in determining the ability of firm in settling off its
current liabilities with the help of short term assets. This ratio is very much useful for
creditors to ascertain whether they should give credit facility to the firm or not and to
what extent.
Year 2015 Year 2016
0
5
10
15
20
25
30
35
40
45
50
Gross profit
Net profit

The liquidity position of firm is good. Looking at its current ratio, the business is able to
pay off its liabilities 2 times through the short term assets held by it. Even if, it is not able to sale
out its inventory, it will be left with enough of assets that can be used for paying its current
debts. After paying them, it will be left with enough of the amount to run its daily operations.
 Efficiency Ratio- It measures the capability of a company in generating income with the
help of the assets hold by it (Lattanzi and et. al., 2019). It also ascertains the time in
which it can convert its sales into real cash.
Current Ratio Quick Ratio
0
0.5
1
1.5
2
2.5
Column 1

It can be interpreted that the debtors and creditors turnover ratios are working properly in
context to each other. The firm has enough time in between it makes payment and collect money.
That means, it holds the capacity to satisfy its creditors without making any delay. The stock
turnover ratio of company cannot be interpreted without comparing the data with some other
firm or with previous results of firm. It takes around 3 months for selling its whole stock, which
can be considered good.
SECTION 4
Discuss the process to improve the financial performance
Accounting ratios are useful only if they are used for improving the performance of firm.
It can done by recognising all the expenses which are not adding any value to the profitability of
business and are taking place unnecessarily (Shin and et. al., 2020). It should also focus on
improving its marketing techniques which will further help in increasing its sales. The finance
department of company can also play important role in improving the health of organisation by
rectifying its debt collection policy and recognising the assets which are not worthy for the
business.
Debtors Turnover Ratio Creditors turnover ratio
0
10
20
30
40
50
60
70
No. of days

CONCLUSION
It can be concluded from the above report that financial management is a very important
aspect of business for planning and controlling the funds of business. It makes the use of
financial statements for analysing the performance of company. For this purpose, the managers
makes use of accounting ratios to evaluate the position . Its results are also used by external
parties for taking accounting decisions.

REFERENCES
Books and Journals
Ganjali, S. and et. al., 2018. Monocyte‐to‐HDL‐cholesterol ratio as a prognostic marker in
cardiovascular diseases. Journal of cellular physiology. 233(12). pp.9237-9246.
Keown and et.al., 2020. Financial management. Prentice Hall.
Lattanzi, S., and et. al., 2019. Neutrophil-to-lymphocyte ratio in acute cerebral hemorrhage: a
system review. Translational stroke research. 10(2). pp.137-145.
Lévy, A., Bouheni, F.B. and Ammi, C., 2018. Financial management: USGAAP and IFRS
Standards. John Wiley & Sons.
Li, W. and et.al., 2020. Data mining optimization model for financial management information
system based on improved genetic algorithm. Information Systems and e-Business
Management. 18(4). pp.747-765.
Mi, R. and et.al., 2020. Utilizing recycled aggregate concrete in sustainable construction for a
required compressive strength ratio. Journal of Cleaner Production. 276. p.124249.
Pawlus, P. and et.al.,, 2020. Material ratio curve as information on the state of surface
topography—A review. Precision Engineering. 65. pp.240-258.
Shapiro, A.C. and Hanouna, P., 2019. Multinational financial management. John Wiley & Sons.
Shin, W. and et. al., 2020. Proposition of deposition and bias conditions for optimal signal-to-
noise-ratio in resistor-and FET-type gas sensors. Nanoscale. 12(38). pp.19768-19775.
Wang, X. and et.al., 2019. Imbalance of circulating Tfr/Tfh ratio in patients with rheumatoid
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Young, J.H. and Legister, A.P., 2018. Project-based learning in international financial
management. Journal of Teaching in International Business. 29(1). pp.76-87.

Appendix

Calculations of Business review template and various ratios