Importance of Financial Management and Ratio Analysis in 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
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Contents
Introduction 2
1

Section 1: Definition and discussion of the concept and
importance of financial management 3
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)
6
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 8
iv. Using the Case study information describing the profitability,
liquidity and efficiency of the company based on the results of
ratio analysis 8
Section 4: Using examples from the case study describing
and discussing the processes this business might use to
improve their financial performance 10
Conclusion 10
References
Appendix 11
2

Introduction
Financial management can be described as handling the account resources
of an organisation. The management analyze the books situation and interpret the
valuable data to take the financial decisions for the firm (Geißler, 2021). The report
aims to analyse about discussing and analyzing the concept of financial
management. On the other hand, in this report there will be discussion about the
main financial statements and explaining the use of ratios. Along with that, there will
be discussion about the process of business which helps the organisation to improve
their financial performance. For further instance, in this report there is preparation
income statement and balance sheet.
Section 1: Definition and discussion of the concept and
importance of financial management
Financial management is one of the most vital activity for the organisation. The firm
needs to prepare its books and statement to calculate the loss and profit which they have
accumulated in the financial year (Mian, and Sufi, 2018). Financial statements give a brief
idea to the firm about their goals and objectives which they had achieved in the market. On
the other hand, it regulates and controls the capital of the firm. This will help the organisation
to carry put their operations smoothly in the market. Company can asses their current assets
and liabilities with the help of financial management. There are several points which
proves the importance of financial management are mentioned below:
 Maintaining the adequate supply of funds – To carry out the regulatory
function the firm needs ensure that there is adequate supply of funds. Funds
helps the organisation to maintain a stable position in the market. On the other
hand, if the business has minimum funds they could make the payment to the
creditors in a systematic manner. The company can transfer the funds from
different sources to carry out the operations effectively in the business.
 Ensuring a good return in investment – Every business ensures that they are
generating enough number of profits in the market. The shareholders invest
huge amounts in the business (Nkukpornu, Gyimah, and Sakyiwaa, 2020).
They only need goods results from the company at every possible situation.
The management finds out the valuable opportunities which helps them to
generate more revenues in the market. Business needs to develop an ability to
generate profits to regulate business for the long term.
 Efficient Utilization of funds – Management needs to utilize the funds
effectively to carry out the operations smoothly in the market. To utilize the
funds the organisation needs to identify and analyse the profit and losses
which they have accumulated in the financial year. With the help of financial
management the organisation can study the right investment opportunities.
They could generate maximum revenues in the market through that
opportunity.
3

Section 2: Description and discussion of the main
financial statements and explain the use of ratios in
financial management
Financial statement is a document which helps the organisation to asses their current
situation in the market. The document provides the vital information about all the expenses,
losses profits which they have generate from the market. The report is prepared in an
systematic manner (Khalfan, and Sturluson, 2018). This helps the management to understand
every aspect effectively. On the other hand financial statements helps the company to
improve their efficiency and -performance in the market.
There are mainly three types of financial statements which are mentioned below:
Balance Sheet – It is one of the most important financial statement which is prepared
by the organisation. It basically includes all the assets and liabilities which is held by the
firm. Most of the companies prepare balance sheet to asses their current situation in the
market. The company could asses their current situation with the help of balance sheet. The
formula which works in this scenario is
Assets = Liabilities + shareholders Equity
According to this formula, it simplifies the structure and working style of the balance
sheet. The report has the benefit it could be presented in both horizontal and vertical manner.
It is prepared according to the accounting rules and regulation. There are two sides in the
balance sheet one is called current and other is non current assets (Frimanslund,
Kwiatkowski, and Oklevik,2022). On the basis of these sides the company accumulate their
situation. On the other hand there are long term assets and liabilities which is carried down by
the company for a longer period of time. These assets are useful in carrying out the
operations effectively in the firm. There is another side of which is called short term assets
and liabilities. These are for a short period of time and the company use this assets for the
better growth in the market.
Income statement – It helps the organisation to summarize all the expenses which
are accumulated while doing the business activities. The company can calculate the income
every month to check the position of business in the market. This could be also called as
profit and loss account. The formula of income statement is:
Income = Revenue – expenses
Income statement is further categorized into two which helps the management to
understand the situation better. In the first part the organisation deals with the goods which
they have manufactured to sell in the market. Firstly, there is calculation of the gross profit
which is accumulated by subtracting the cost of the goods manufactured and the sales in the
market (Connolly, and Bank, 2018). Then, the amount is carried forward to next portion in
which the organisation ascertain all the net profits by the business from the operating
activities. After the completion of this factor the incomes and expenses are calculated which
is done by the organisation in the market (Kregel 2018). It is deducted from gross profit. The
end result which is formulated by doing all the activities is further divided into the investors
and shareholders. The distribution of dividends is divided into various categories:
Cash flow Statement – It helps the company to accumulate the flow of cash by doing
different operations in the market. This statement could be prepared monthly or annually
depending on the organization (Hertati, and et.al, 2020). On the other hand, there is a proper
measure of the incoming and outgoing of cash equivalents of the firm. The main motive of
preparing a cash flow of statement is to understand the optimum utilization of resources
4