Importance of Financial Management and Ratio Analysis for Business Performance

This report discusses the importance of financial management and ratio analysis for business performance. It covers financial statements, ratios, and ways to improve financial performance. The report also includes a Business Review Template and Excel sheets for income statement and balance sheet. The subject is Applied Business and the course code is Finance.

Applied Business
Finance

Contents
INTRODUCTION...........................................................................................................................4
MAIN BODY...................................................................................................................................4
SECTION 1......................................................................................................................................4
Discuss the importance of financial management..................................................................4
SECTION 2......................................................................................................................................5
Describe main financial statements and discuss the use of ratios in financial management..5
Use of ratios in financial management...................................................................................6
SECTION 3......................................................................................................................................7
By using the template provided..............................................................................................7
Complete the 'Business Review Template'........................................................................8
Using Excel prepare an income statement.........................................................................8
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..........................................................................................10
SECTION 4....................................................................................................................................12
Discuss the process to improve the financial performance..................................................12
CONCLUSION..............................................................................................................................12
REFERENCES..............................................................................................................................13
Books and Journals...............................................................................................................13

INTRODUCTION
Business finance plays a major role in an organisation. It is necessary for a company to
manage its accounts in such a manner that they are able to have liquidity and resources. Financial
management is a process of handling the accounts of a firm, interpreting and controlling its data
and taking all the important decisions (Bapat, 2020). The task is to manage the accounts and
evaluate the performance of business organisation. It is important to show the real performance
of the business organisation to internal as well as external parties that are interested in the
information. In this report the importance of financial management is discussed. Importance of
accounting statements and the use of ratios is also being analysed. Afterwards, financial data is
calculated related to performance of a company. In end of this report the suggestions to improve
the financial performance of the company are being mentioned.
MAIN BODY
SECTION 1
Discuss the importance of financial management
Financial management is one of the important function that is carried by finance department
in an organisation. it includes managing the expenses and making them with revenue so that the
profitability position of the organisation can be calculated (Block, Hirt, and Danielsen, 2018). It
helps to control the monetary resources in a business organisation so that a company is able to
achieve its target is the practice of controlling capital of a business so that they are able to
achieve success. It is related with the short term planning of working requirements and main
focus is on assets as well as liabilities of the company. Importance of financial management is
discussed below:
Maintaining enough supply of funds: Financial management help for company to have in
a supplier of point so that they are able to manage their operations. It focuses on managing the
debtors and creditors turnover ratio that provides opportunity to pay creditors at right time
(Bulturbayevich, and.et.al., 2020). Over all the availability of funds can be managed easily by the
business.
Return on investment: Every investor wants to get maximum return on investment they
have done. It is duty of the company to use the funds and optimum manner so that they are able

to attain profit. Proper financial management reduces the risks and funds are used in such a
manner that the company is able to generate high profit and gives good return on investment.
Better utilisation of funds: Managing the capital of company is one of the important task.
The money of investors must be used in proper manner so that they are able to attain successful
position (Chernov, 2020). There is proper research required before investing money so that
profitability position of firm is enhanced. The funds are invested at right place after taking a wise
decision.
SECTION 2
Describe main financial statements and discuss the use of ratios in financial management
Financial statement can be defined as report that includes summary of all the activities that
are carried in accounting period. It provides information related to the balances of income census
liabilities and assets (de Azevedo, and.et.al,, 2020). There is a structured format to formulate the
financial statements so that the information is presented in an effective manner. The main type of
financial statements are as follows:
Balance sheet: It is snapshot of the details of the company. It helps to get detailed
information related to assets, liabilities of the company held during a year. It shows the required
information to the stakeholders of the company. It can be calculated through Assets = Liabilities
+ Shareholders Equity. It is mandatory to note that both sides must be equal to one another.
The balance sheet is presented in horizontal as well as vertical format as per the organisation
preference. The main thing is that both the sides must be balanced and show equal amount
(Mitchell, and Calabrese, 2019). These are divided into two that is current and noncurrent.
Current liabilities are for shorter duration of time as well as non current liability is a for longer
duration of time that is generating more than one year.
On the other side there is current and noncurrent assets the current assets include cash debtors
stock acceptor that are required for operating the business on daily basis. And the long-term
assets are for a period of more than one year.
Income statement: It is summary of all the expenses and revenue incurred by the
company. It is also known as profit and loss account. There is need to make the statement by
including all the information related to company. The formula being used is Income = Revenue

– Expenses. There are two parts that are being studied under income statement. In the first part
there is discussion related to the items that are related to manufacturing directly. The gross profit
can be calculated by subtracting cost of goods sold from sales. In the next part the gross income
is carried and then net profit calculated (Osipov, Ziyatdinova, and Girfanova, 2018). All the
indirect expenses and incomes are being calculated and net earnings of the company are known
by the company. The stakeholders are able to know about the income and expenses of the
company.
Cash flow statement: This statement includes the inflow as well as outflow of the
company to operating investing as well as financing activities. The main aim behind forming
cash flow statement is to know about the position of the company and the liquidity being
maintained by them. It helps the user to know about the money that comes with the company and
that goes out of the company. All the activities related to cash flow statement are mentioned
below:
 Operating activities: all the activities are related to core operations of the business are
called operating activities. It includes most of the items such as sale of inventory,
payments, cash received etc.
 Investing activities: it includes the investment made by the business and records the
inflow and outflow made due to investing activities. It includes sale or purchase of fixed
assets, acquisition of shares or debentures, loan given to the vendors etc.
 Financing activities: all the activities that involves financial activity are included
(Plaskova and et.al., 2019). Basically issue of shares, payment of dividend, loan
repayment of loan is included in financing activities.
The above three statements are integral part of financial statement and that helps to know
about the position of a company. The data is useful for the stakeholders to take various diseases
and the company's able to analyse its performance as well.
Use of ratios in financial management
Accounting ratios helps to check the relationship among the different values that are part
of balance sheet income statement. It helps in knowing about the efficiency as well as
profitability position of the company. The users use the ratios to compare different forms as well.
The use of ratios is discussed below:

Tools for controlling performance: management can be defined as a process of utilising the
resources in an effective manner. Ratio analysis is a tool that helps in financial management so
that the performance of a company can be enhanced. There are standard set that help employees
to generate profitability according to their actions so that best outcomes can be achieved
(Titman, and Keown, 2018). It helps in identifying the best areas and enhanced flexibility so
that the performance is enhanced.
For preparing future plans: by integrating the data and strength ratio help to analyse the way a
company is performing. If the movement is favourable, then the company's able to know about
its good image in the market. It also helps the internal users to review their performance as well
as make more improvements. To illustrate the profitability ratio of help to know about the
present profit made by the company and if there is enhancement in the year the company is able
to know the trend of profit in the market
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- This ratio helps the company to know about its financial position that
is profits earned by them. It helps them to check the investment, the operations. It assist
the company to know about the revenue generating capacity of company.
It is seen that there is enhancement in the profit made by company. There is slight
decrease in the gross profit being earned by company. At the same time the net profit has
shown good rise in the figure. The business organisation has controlled the indirect
expenses. It helps the company to enhance their profits and attain success.
 Liquidity ratio- The ration helps the company to check the ability of current
assets in setting off its current liability. This is most useful for the creditors s they
can decide over credit giving capability of the firm.

It is a good figure as the company has ability to pay the liabilities in 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. The company has capability to keep cash with
them after they have paid off the liabilities.
Efficiency Ratio- The company is able to check income generated by the firm with the
help of assets being held by them. The firm is able to know the time in which the company is
able to convert its sales into real cash.
It can be analysed that the debtors and creditors turnover ratios are working properly in
regard to each other. The business has time to collect money and then make payments. They will
be able to satisfy the creditors. There is proper management seen by the company.
SECTION 4
Discuss the process to improve the financial performance
Accounting ratios are one of the important tool that helps the concrete to know about their
financial position. We can also be used with company in order to enhance performance. The
company is able to avoid is all the expenses that are not adding value to their profitability. all the
unnecessary expenses can be cut by the company by using right technique and that will in the

and help to enhance to sales. The company will be able to enhance its health by rectifying the
debt collection policy and the value that can be created by the assets
CONCLUSION
From the above report, it is concluded that financial management plays a vital role in
success of the company. It is a process of managing the finance of the company so that they are
able to create good image of the company. This is required by the company so that all the
stakeholders are satisfied with the performance of the organisation. The importance of financial
position is shown in this report. The important financial statements are also part of this report.
The ratios that assist the company to know about their position are examined. In the end
suggestions related to overall benefit of company are discussed.

REFERENCES
Books and Journals
Bapat, D., 2020. Antecedents to responsible financial management behavior among young
adults: moderating role of financial risk tolerance. International Journal of Bank Marketing.
Block, S.B., Hirt, G.A. and Danielsen, B.R., 2018. Foundations of financial management.
McGraw-Hill Education.
Bulturbayevich, and.et.al., 2020. Modern features of financial management in small
businesses. International Engineering Journal For Research & Development, 5(4), pp.5-
5.
Chernov, V.A., 2020. Implementation of Digital Technologies in Financial
Management. Ekonomika Regiona, (1), p.283.
de Azevedo,and.et.al.,, 2020. Financial management information systems and accounting policies
retention in Brazil. International Journal of Public Sector Management.
Mitchell, G.E. and Calabrese, T.D., 2019. Proverbs of nonprofit financial management. The
American Review of Public Administration, 49(6), pp.649-661.
Osipov, P., Ziyatdinova, J. and Girfanova, E., 2018, September. Factors and barriers in training
financial management professionals. In International Conference on Interactive
Collaborative Learning (pp. 167-175). Springer, Cham.
Plaskova, N.S., Prodanova, N.A. and Reshetov, K.Y., 2020. Dealing operations as a means of
improving the efficiency of the financial management of a production company.
In Complex Systems: Innovation and Sustainability in the Digital Age (pp. 61-70).
Springer, Cham.
Shapiro, A.C. and Hanouna, P., 2019. Multinational financial management. John Wiley & Sons.
Titman, S. and Keown, A.J., 2018. Financial management: Principles and applications. Pearson
Education, Inc..