Importance of Financial Management and Processes for Improving Financial Performance

This report explains the concept and importance of financial management, financial statements, and ratios for improving financial performance. It includes a business review template, income statement, and balance sheet. The report also suggests ways to improve financial performance. The subject is Applied Business Finance (BMP3005) for Business Management with Foundation (top 16851).

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
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Contents
Introduction 1
Section 1: Definition and discussion of the concept and
importance of financial management 1
Section 2: Description and discussion of the main
financial statements and explain the use of ratios in
financial management
2
Section 3: Using the template provided 2-6
i. Completing the Information on the ‘Business Review Template
(Ensure that you display your calculations for this detail)
2
ii. Using Excel producing an Income Statement for the Sample
Organisation (see Case Study). This should be included within
your appendices 4
iii. Using Excel completing the Balance Sheet 5
iv. Using the Case study information describing the profitability,
liquidity and efficiency of the company based on the results of
ratio analysis 6
Section 4: Using examples from the case study describing
and discussing the processes this business might use to
improve their financial performance 7
Conclusion 7
References
Appendix 9
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Introduction
Financial management is the most substantial part of managing the funds and
appropriately considering the monetary aspects and economic activities. Financial
knowledge is needed to arrange finances from the market (Ayub, 2018). In the
following report it mainly divided into 4 segments. In section 1, Concept and role of
fiscal administration is explained. In second section, it explains about the key
financial statement of the management. In Section 3, business review template has
been given of the annual missing data of the organization along with income
statement and Balance Sheet. In Section 4, ratios need to be calculated and also
interpreted and ways are considered to improve the financial position of the business
concern.
Section 1: Definition and discussion of the concept and
importance of financial management
Financial Management is a concept of how a business manages its financial
requirements by applying management principles. It is basically focused on the
business activities that helps in increasing the profits of the business concern. It
clarifies difference between the total expenditure and incomes of the business
concern (Baker, Kumar and Pattnaik, 2021). It helps the business in making plans
regarding future investments and disinvestment process.
Significance:
1. Managing business procedure: The available cash in the business is used
by the organization in business activities. For such information various ratios
such as stock turnover ratio, creditors and debtor’s turnover ratio is
calculated. Payments are made on time to insure that the organization have
significant amount to cash reserves.
2. Balance of funds: Finance department helps in managing the funds and
allocating these funds for the investment purpose and also helps in allocating
it to the core business activities.
3. Decision making: Financial management helps business concern in making
decision that are fruitful for the management. This helps in making decision
regarding the economic factors and monetary activities of the business
organization. This is reason why every department is indirectly controlled by
the finance department (Corrales, Fenwick and Haapio, 2019).
4. Long term stability: It helps businesses to sustain for the long time in the
market. It facilities companies in decreasing the irrelevant expenditure of the
business concern.
Section 2: Description and discussion of the main
financial statements and explain the use of ratios in
financial management
Fiscal statement is the most essential part for a business concern what is to
be published in form of annual accounts on the website of the organization. It is
basically prepared for the whole financial year, which includes revenue,
expenditures, cost, profit, outflow and inflow of cash, liabilities and assets are
recorded to analyze the performance of the data. This information is generally used
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by the management as well as the stakeholders of the business. Few of the financial
statements are discussed below.
1. Income Statement: It is part of financial statement, which helps is
determining the actual profits of the organization. Profits are determined after
subtracting the cost incurred in the process by total income earned during the
whole year. According to income statement, it is divided into two parts mainly
first part contains the income earned by the organization and the second part
contains all the expenditure incurred in the process. Then these expenses are
subtracted from the income earned during the year. This helps in ascertaining
the profit of the organization (Hofert and et.al., 2018).
2. Balance Sheet: This statement is mainly consisting of two sides that are
asset side and liabilities side. Assets side mainly consists of two segment
namely current asset and non-current asset which includes stock, intangible
assets, investments. On the other hand, liabilities side includes segment such
as shareholders fund, non-current liabilities and current liabilities which
includes trade payables, capital, retained earnings, borrowings, etc. It
facilitates in knowing the amount of risk that the organization can take is to be
considered.
3. Cash Flow Statement: This is one of the financial statement that is used for
calculation of cash inflows and outflows of cash. In facilitates in making
decision of managing the funds and the remaining amount is used for future
investment. Cash Flow Statement is divided into three parts namely financing
activities, operating activities and investing activities. Operating activities
includes expenses and incomes related to the day to day working of the
business concern. Investing activity includes activities which are related to the
future investments and amount released from the past investment. Financing
activities includes activities that are related to the issue of share capital and
redemption of share capital or debenture.
Usage of accounting data:
 While analyzing the monetary records of an organization the executives have
to consider the data available in accounting terms. Various monetary and
complex figures are evaluated with the help of ratios (Muijsson and Satchell,
2020).
 Accounting data is used by the organization to participate in assortment of
various business regions. This facilitates in deciding the portion of obligation
on the business concern.
 Accounting data helps in ascertaining the financial risk associated with the
business organization. Ratios helps in predicting the risk in advance and also
caters the risk associated with the business.
 It helps business entity in future planning and forecasting activities that will
help the business organization in considering the actual risk associated with it.
Section 3: Description and discussion of the main
financial statements and explain the use of ratios in
financial management
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Section 3: Using the template provided:
v. Completing the Information on the ‘Business Review Template
(Ensure that you display your calculations for this detail)
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
1. Profitability ratio: It helps in determining the amount of profit earned by a
business concern during the period of a year. It computes the amount of profit
business earn during the period of one year. It basically represents the actual
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financial position of the business and also evaluates the amount of profit
earned by the organization (Netter, Poulsen and Kieser, 2018).
Results: From the above calculated ratio it can be ascertained that the
organization’s gross profit have decreased by approximately 20%. The Net profit is
earned by the organization is significant but it can be increased by decreasing the
operating cost incurred by the business concern. It shows a scope for the
management to take corrective measures to increase the profitability of the business
organization. Gross profit is 42.76% and Net gain is 22.7% which means that the
profits of the business is decreased. Thus it has to consider the reason behind the
decrease in the profit.
2. Liquidity Ratio: This tool is used to measure the short term paying capacity of
a business organization. This also helps in determining the amount company
has in order to pay its creditors. It is mandatory for every business concern to
maintain the liquid assets within the organization (Schäfer, 2019). This currently
involves stocks, current liabilities and current assets.
Interpretation: The above calculated ratios states that the organization is able
to generate significant amount of profit to pay its current outstanding. The
ideal liquid ratio is 1:1 and current ratio is 2:1. In the following case
organization have earned a significant amount of profit in order to pay the
amount outstanding. Business have more than twice amount of current assets
to pay its total current outstanding. It can also ascertain that the business
organization is able to set off its current liabilities with the current assets.
3. Efficiency Ratio: This ratio helps in determining the amount of sales generated
by the organization with the help of the assets of the business (Siala and
Jarboui, 2019). It determines the capacity of a business concern to generate
sales from available assets.
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Analysis: From the above calculated ratio it can be concluded that the
organization is able to generate more sales than the total assets of the
business concern. Company is being able to pay off its creditors on time
because it has sufficient of current assets as well as the debtors also pay the
organization before company make payment to its creditors.
Section 4: Using examples from the case study describing
and discussing the processes this business might use to
improve their financial performance.
The above portion of the report consists of evaluation of financial data and its
monetary usefulness. Stakeholders use the supported data in order to make investment
in the organization to ascertain the actual financial position of the business and also
helps to know the viability, profit and soundness of the management. Therefore, the
financial statements are also helpful for the management, it acts as a supporting fact in
order to manage the future plans (Vanderklift and et.al., 2019).
An entity can accomplish its goals by concentrating on management practices and
utilizing promoting techniques. It keeps manages every aspect of the business from book
keeping to board of directors reports which contains all the financial statement along with
the future plans as well the current achievements of the business.
It mainly focuses on the advertising and acquiring buyers in order to increase the
market share of the organization. Increased customer base helps organization in
increasing the amount of profit derived and future profitability.
An organization have to manage its available resources to be benefited from the
available resources and generate income. Thus an organization needs to focus on the
optimum utilization of resources.
Effective marketing strategies helps firm in generating income and also helps in
reducing the cost associated with the product. Entity can use various resources such as
digital marketing which will effectively manage people and it is also cost effective
(Viriyasitavat and et.al., 2019).
Conclusion
The above report defines the fundamental and essentials of any business
concern. It helps management in preparing future planning’s and designing the
framework for the employees of the company. It will help in forecasting the future the
business conditions as well as getting ready for the authority’s issues faced by the
business concern. The ratios are calculated to the actually financial condition of the
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business organization and as well as help in examine the financial statement. At last
ways are described through which the entity can improve their performance.
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References
Ayub, M., 2018. Islamic finance crossing the 40-years milestone-the way
forward. Intellectual Discourse, 26.
Baker, H.K., Kumar, S. and Pattnaik, D., 2021. Twenty-five years of the journal of corporate
finance: a scientometric analysis. Journal of Corporate Finance, 66, p.101572.
Corrales, M., Fenwick, M. and Haapio, H. eds., 2019. Legal Tech, Smart Contracts and
Blockchain. Singapore: Springer.
Hofert, M. and et.al., 2018. Elements of copula modeling with R. Springer International
Publishing.
Muijsson, C. and Satchell, S., 2020. The role of bank funding in systematic risk
transmission. Finance Research Letters, 33, p.101222.
Netter, J.M., Poulsen, A.B. and Kieser, W.P., 2018. What does it take? Comparison of
research standards for promotion in finance. Journal of Corporate Finance, 49,
pp.379-387.
Schäfer, H., 2019. Understanding How Stakeholders Are Affecting Sustainability and
Finance. In On Values in Finance and Ethics (pp. 61-70). Springer, Cham.
Siala, S.B. and Jarboui, A., 2019. The moderating effect of audit quality on the relation
between shareholder activism and earnings management: Evidence from
France. Contemporary economics, 13(1), pp.63-78.
Vanderklift, M.A. and et.al., 2019. Constraints and opportunities for market-based finance for
the restoration and protection of blue carbon ecosystems. Marine Policy, 107,
p.103429.
Viriyasitavat, W. and et.al., 2019. Blockchain and internet of things for modern business
process in digital economy—the state of the art. IEEE Transactions on
Computational Social Systems, 6(6), pp.1420-1432.
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Appendix:
Income Statement
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