Importance of Financial Management and Processes to Improve Financial Performance

This report discusses the concept and importance of financial management, financial statements, and the use of ratios in financial management. It also provides an analysis of a case study's financial performance and suggests strategies to improve it. The report is for BSc (Hons) Business Management with Foundation 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
:
Contents
Introduction p
Section 1: Definition and discussion of the concept and
importance of financial management p
1

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
i. Completing the Information on the ‘Business Review
Template (Ensure that you display your calculations for this
detail)
p
ii. Using Excel producing an Income Statement for the Sample
Organisation (see Case Study). This should be included within
your appendices p
iii. Using Excel completing the Balance Sheet p
iv. 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
The concept of financial management is one of the most important prospect
to run the business as it assures organizational activities to run smoothly
without any disturbance in allocation of financial resources. The existing
report states the importance of financial management and along with it
concepts related to financial statements and the usage of financial ratios in
company’s operations. Moreover, this report also includes examples of
certain ratios from case study with help of income statement as well as
balance sheet (Abounoori, 2018). Review of business performance will also
be conduct in this report for making an analysis of its financial performance.
Furthermore, strategies required by firm to improve its performance are also
going to be discussed and along with it there will be a description of factors
from case study that help in analyzing business performance.
Section 1: Definition and discussion of the concept and
importance of financial management
The concept of financial management is referred to the strategic planning,
directing as well as controlling of monetary undertakings. Similarly, it incorporates
the application of management principles to financial resources of an organization
while it has a crucial impact in financial administration. There are some important
points that are to be taken into consideration while conducting business operations:
 Guaranteeing capitalists of the organization for achieving higher profitability
level from their revenues.
 Creating genuine as well as safe venture freedoms for putting resources into
(Agyapong and Mordi, 2020).
 Keeping up with sufficient inventory of assets for the organization.
 Optimum utilization of assets
Importance of financial management:
There are several importance of financial management within an organization
and some of them are described as follows:
Formation of capital structure: For making calculation of the capital that is
required within the organization, the design should be formed in an appropriate
manner. Any organization that depends on the measure of the capital as well as
the amount it has should be increased from the external sources.
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Allocation of funds: Within an organization, there should be appropriate
allocation of funds according to the profitability of the business. It helps in
improving the financial resources as well as reducing the costs and expands the
state of monetary of the organization.
Helps in financial decision: Financial management within the organization
helps in taking the critical monetary- oriented choices of business (Currie and
Pandher, 2020). It helps in ascertaining different types of risks as well as
choices and also facilitates in making selection of the extent of capital and
acquired assets of investors.
Economic stability: It is another importance of financial management that
gives business an immovability because it helps in addressing the strong
monetary framework. It can keep monetary resources from activities of business
that can be corrupting for association as well as facilitates in acquiring and
maintaining more advantages.
Profitability: Within the organization, if books of accounts and the resources
are appropriately managed then financial management helps in enhancing the
level of productivity as well as profitability of the business. This would also
facilitate the company in making an analysis of the efficiency and development of
opportunities of the business.
Section 2: Description and discussion of the main
financial statements and explain the use of ratios in
financial management
Financial statements are the financial records of the company that are
compulsory for each listed organization to maintain. Financial statements
within the organization expresses the monetary activities of the business.
These types of statements give financial information and data that shows the
fiscal position of the company. It is mandatory for an organization to get
financial statements audited and it is also a responsibility of the financial
manager within an organization (Du and et.al., 2020). The financial
statements of the organization can be audited through the internal as well as
external sources of the organization. It guaranteed that the statements that
are got published by the organization is not forged and are considered as
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authentic. There are mainly four types of financial statements that are used
by the company and these are discussed as under:
Income statement: This kind of financial statement tells about the revenues,
income, expenditures as well as the accrued or outstanding incomes and
expenses that have been occurred in the financial period. Similarly, it
expresses the business transactions that have been done in the period as
well as what were the costs that have been faced by organization to increase
the sales and profits of the company (Goutte and et.al., 2020)
. By reducing the costs as well as wages of the organizational period, it helps the
financial managers in ascertaining the net profit within the company.
Balance sheet: It is considered as the most important financial statement of the
organization because it helps in providing comprehensive understanding of the
financial records to the clients regarding monetary data. This kind of financial
statements expresses about the assets as well as liabilities of the company that an
enterprise is committed to pay in future period. Addition to it, balance sheet of an
organization perceived as a monetary record that is fundamentally the main concern
of business.
Cash flow statement: With the help of this financial statement, the financial
managers within the organization can easily show the new amount of cash inflow as
well as outflow from the business during a specific period of time (Grossmann and
et.al., 2019). It also facilitates in displaying the fluctuations within the cash from
operating, investing as well as financing activities that occurred within the business
during the period of an accounting year.
Section 3: Using the template provided:
v. Completing the Information on the ‘Business Review
Template (Ensure that you display your calculations for this
detail)
The Net Profit for the year 2016 is £43,057. (2015: £18,987,000).
The key financial as well as other performance indicators of the company during
the year were as follows:
2016
£’000
2015
£’000 Change %
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Turnover (continuing operations) 189711 179587 +5.6%
Profit for the financial year 43057 18,987 +126.77%
Shareholder’s equity 83802.75 63,057 +32.9%
Current assets as % of current liabilities 222 % 304.00% -82%
Customer satisfaction 4.5 4.1 +10%
Average number of employees 649 618 +5%
The turnover within the company from continuing business operations has raised
by 5.6% during the accounting year because of the acquisition of the
Extinguishers business that were held on May1, 2015 that has made a
contribution of full year in 2016.
Gross Profit= £81,125
Net profit= £43057
Net Profit increased in 2016 by 126.77% during the accounting year.
The equity of Shareholders has increased by 32.9% by £20,745.75
The quick ratio of the company is calculated as follows:
Quick ratio = Quick assets / Current liabilities= 1.47:1
The current ratio of the company is calculated as follows:
Current ratio= Current Assets / Current Liabilities = 2.22:1
(The calculations for these financial ratios are shown in Appendix)
vi. Using Excel producing an Income Statement for the Sample
Organisation (see Case Study)
This is included within appendix
vii. Using Excel completing the Balance Sheet
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viii. Using the Case study information describing the
profitability, liquidity and efficiency of the company based on the
results of ratio analysis
Profitability Ratios: These are considered as a category of fiscal parameters which
are used to assess the ability of a company for the creation of earnings over
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time in respect of the various types of components of the Income Statement
as well as Balance Sheet of a financial year with the help of analysis of the
company’s performance (Leshchinskii and Maksy, 2019). There are some of
the profitability ratios that are described as under:
 Gross Profit margin ratio= (Revenue – Cost of goods sold) / Revenue * 100
= (189,711 – 108, 586) / 189,711 * 100 = 42.76%
 Net Profit margin ratio= (Net profit / Revenue) * 100
= (43,057 / 189,711) * 100 = 22.70%
Interpretation:
The above calculation of the financial ratios expresses that the percentage of
profits in relation to the sales that are generated within the organization in
consideration with the operating as well as non-operating expenses. Gross profit
margin is defined as the proportion of funds that are left from the revenues. Net profit
margin is defined as the percentage of the income that is retained after the cost from
the revenue. Gross profit margin is 42.76% and the net profit is 22.7% that shows
the profits within the organization is reduced by 20% approximately. Therefore,
organization is required to drop their overhead costs that is creating disturbance in
earning more net income and profits within the company. It is very crucial for the
investor of the organization to make a comparison of profits with other companies of
homogeneous industry for knowing its position in industry.
Efficiency Ratios: This kind of ratio helps in measuring how well organization is
making use of its assets as well as liabilities. It also measures how quickly
company manages to collect its payments from its clients as well as how long
it takes to complete repayment of debts (Liu, 2018). There are some
efficiency ratios that are described as below:
 Asset Turnover ratio: Total sales / Total assets = 189,711/153,647 = 1.23
 Stock Turnover ratio: Cost of goods sold / Stock = (108,586/28,571) = 3.8
 Accounts receivable days: 365 / Debtors turnover ratio = 365/ 7.19 = 50.77
days
 Accounts payables days: 365 / Creditors Turnover ratio = 365/7.04 = 51.84
days
Interpretation:
From above calculation of the efficiency ratios, it has been interpreted that
average customers take approximately 5days to pay their debts while creditors take
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52days to receive payments. So, organization pays and receives its debts as well as
payments almost in same time period. However, it can be a drawback also as if
receivable days’ decrease then it might create a trouble for company. The stock
turnover is 3.8times which means that complete investment of stock flows around
4times in a year, that is, 3months in a year. Total assets turnover ratio is 1.23 which
means that organization is doing well as well as producing adequate revenue at end
of financial year for sustaining in industry.
Liquidity Ratios: This ratio helps in ascertaining ability of organization to pay its
obligations and also states its solvency (Madhani, 2021). The main liquidity
ratios are as under:
 Current Ratio: Current Assets / Current Labilities = 84,349/ 37,928 = 2.22:1
 Quick Ratio: (Current Assets – Inventory) / Current Labilities
= (84,349 - 28571)/ 37,928 = 1.47:1
Interpretation:
From above calculation, it can be interpreted that this ratio tells about liquidity
of company. It can be observed that current ratio is 2.22:1 which shows that
company is solvent. However, quick ratio is 1.47:1 which shows that organization
has adequate cash to pay-off its obligations.
Section 4: Using examples from the case study describing
and discussing the processes this business might use to
improve their financial performance.
Financial performance: It is a life-sustaining concept of business and helps
investors in making decisions regarding investment in organization.
Therefore, it is very significant for taking corrective actions while
substantiating decisions regarding funds. To know financial performance of
company, financial ratios also help accounting managers to make correct
decisions (Romano and et.al, 2018). From above calculation, it can be
evaluated that:
 The current ratio of company declined by 82% from last year that shows cash
outflows are more and organization is losing its liquidity.
 Net profit increased by 126.77% because non-operating costs like interest,
administrative expense has declined.
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 Customer satisfaction proves that company is investing more due to which
employee retention increased.
 Shareholder’s equity got increased due to which selling of shares, reduction in
operating expenses and increment in revenue has risen.
Improvements:
Marketing strategies help in reducing cost and doing optimum utilization of
resources that helps in generating more profits (Steurer, 2021). For instance,
promotion on social media is cheaper and smarter way to capture more
customers.
Optimum utilization of resources facilitates in lowering cost and will lead to
increment in profits as well as productivity along with efficiency.
Inventory reduction and increase in its turnover expresses leverage in working
capital requirements.
Conclusion
From above explanation of report, it has been concluded that financial
management plays a crucial role in business operations. It helps in taking business
decisions, allocation of funds, depicts viability and economic stability as well as
solvency of company. In this report, importance of financial management has been
described and along with it there has been a description of different financial
statements and use of fiscal ratios in business. Furthermore, there has been
calculation and interpretation of different financial ratios. Moreover, financial
performance of business has been evaluated and improvements that can be done
have been discussed in this report.
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References
Books and Journals
Abounoori, E., 2018, July. Symposium: Applied Mathematics/Statistics in
Economics, Management & Finance. In AIP Conference Proceedings (Vol.
1978, No. 1, p. 200001). AIP Publishing LLC.
Abounoori, E., 2018, July. Symposium: Applied Mathematics/Statistics in
Economics, Management & Finance. In AIP Conference Proceedings (Vol.
1978, No. 1, p. 200001). AIP Publishing LLC.
Agyapong, G.T. and Mordi, C., 2020. Entrepreneurship and Entrepreneurial Finance
in Ghana. In Entrepreneurial Finance in Emerging Markets (pp. 345-360).
Palgrave Macmillan, Cham.
Currie, R.R. and Pandher, G.S., 2020. Finance journal rankings: Active scholar
assessment revisited. Journal of Banking & Finance, 111, p.105717.
Du, M., andet.al., 2020. Supply chain finance innovation using blockchain. IEEE
Transactions on Engineering Management, 67(4), pp.1045-1058.
Goutte, andet.al 2020. Handbook of Energy Finance: Theories, Practices and
Simulations. World Scientific.
Grossmann, andet.al 2019. Inclusion fairness in accounting, finance, and
management: An investigation of A-star publications on the ABDC journal
list. Journal of Business Research, 95, pp.232-241.
Leshchinskii, D. and Maksy, M.M., 2019. Factors Associated with Student
Performance in Finance Electives: An Empirical Study at a US Private
College. Journal of Applied Business & Economics, 21(7).
Liu, J., 2018, September. Research on internet finance: Its business models and
development trend. In Proceedings of the 2nd International Conference on
Business and Information Management (pp. 169-172).
Madhani, P.M., 2021. Lean Six Sigma in finance and accounting services for
enhancing business performance. International Journal of Service Science,
Management, Engineering, and Technology (IJSSMET), 12(6), pp.141-165.
Romano,and et.al , 2018. Climate Finance as an Instrument to Promote the Green
Growth in Developing Countries. Springer International Publishing.
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Steurer, R., 2021. Kafka: Real-Time Streaming for the Finance Industry. In The
Digital Journey of Banking and Insurance, Volume III (pp. 73-88). Palgrave
Macmillan, Cham.
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Appendix:
Calculations performed for the above case study
 Net Profit of 2016= Revenue- Cost of goods sold- non-operating expenses
= 189,711 – 108,586 – 38,068 = 43,05
 Change in profit %= (Current year– previous year profit)/ Previous year Profit
= (43,057 – 18,987) / 18,987 = 126.77%
 Shareholder's equity = 63,057*32.9% = 20745.75
= 63,057+20,745.75 = 83802.75
 Current assets as % of current liabilities = 324% - 82% = 222%
 Gross Profit = Net profit+ non-operating expenses
= 43,057+ 38,068 = 81,125
 Quick Ratio = Current Assets - Stock/ Current Liabilities
= 84,349 - 28,571/ 37,928 = 1.47:1
 Current ratio = Current Assets/ Current Liabilities = 84,349/ 37,928 =
2.22:1
 Debtors Turnover Ratio = (Net Sales / Debtors) = 189,711/ 26,367 = 7.19
 Creditors Turnover Ratio = Cost of Sales+ Stock/ Creditors
= 108,586+ 28571/ 19,493= 7.03
Income Statement
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