Importance of Financial Management and Ratio Analysis for Business Performance Improvement

This report discusses the concept and importance of financial management, financial statements, and ratio analysis for business performance improvement. It covers the processes businesses can use to improve their financial performance. The report includes examples from a case study and discusses profitability, liquidity, and efficiency ratios. It also provides insights into the importance of financial planning, allocation of funds, investment opportunities, and long-term stability.

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
Submitted by:
Name:
ID:
Contents
Introduction p
1

Section 1: Definition and discussion of the concept and
importance of financial management p
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
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Introduction
Financial management may be considered as that department or functions in
a firm which is related to the cash, credit, expenses and profit, so that firm can carry
out its objective as satisfactory as possible. In simple terms this is the procedure of
managing the capital in the company (Spearman, 2019). The following report is
going to focus on the concept of financial management and its significance for the
business organization. This report also discussed about the various forms of
financial statements and the ratios in management. Afterword, with the help of
balance sheet an income statement is completed and an analysis has been
performed on the outcome of the ratios. Furthermore, in order to improve the
performance of the company for its development an analysis has been cover in this
report.
Section 1: Definition and discussion of the concept and
importance of financial management
Financial management is defined as the method of planning, organizing,
controlling and directing all the financial functions of the business like arranging of
fund, procurement of fund, utilization of fund and many more. With the help of
financial management, a balance has been creating among the procurement of fund,
financial planning, profit administration and sources of funds (Naranjee, Sibiya and
Ngxongo, 2019) . This area of firm is responsible for managing the resources, asset
and liabilities in a very effective manner which assist them in increasing their
sustainability and revenues. An important role is played by financial management
within the organization. The importance of financial management has been
discussed below: -
 Financial planning: - this is being considered as one of the most important
importance of financial management. This assist in deciding the need of fund
by the business organization. All the credit for the success of the business is
totally depend on the financial planning of the organization.
 Allocation of fund: - financial management assist the business organization
in the allocation of the fund in a very effective manner. If the proper use of
allocated finance to the asset is done then this enhances the operational
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proficiency of the firm. The proper allocation of the fund result in reducing
expenses and increase in capital for the company ( Wiharno, 2018).
 Investment opportunities: -if the company is good in managing the finance
and saving then this allows the management of the company to explore the
different investment opportunities. These opportunities not only assist the
organization in creating wealth but also help them in understanding the risk
and return on investment.
 Long term stability: -this assists the organization in ensuring the long-term
sustainability. This not only monitor or check the profits but also allocate the
cost and fund in a very effective manner which will help in minimizing the idle
expenditure. The proper financial management also ensure the economic
growth. This allow the firm to expand its wealth creation which help them to
financially and improves their sustainability in the market.
Section 2: Description and discussion of the main
financial statements and explain the use of ratios in
financial management
The financial statement may be defined as those written documents which
comprises of all the transactions of the company which is related to the money.
These statements not only assist in conveying the financial position but also assist in
conveying the performance of the business(Boma, 2018) . These statements are
made by the financial department of the company and audited by the accountants,
firms, government agencies and many more. It is very important for the management
of the company to keep all these statements in a very proper manner because these
statement act as a summary of the company financial situation and clearly defined
the current status. There are different types of financial statement which are
mandatory to made form which some of them discussed below: -
 Balance sheet: - this is considered as the most vital accounting statement
which is mandatory to be made by the business organization. This statement
is bifurcate into two portion i.e., asset and liabilities in which asset of the firm
are shown on the right hand side and the liabilities of the firm are shown in the
left side. This statement is majorly made by the organization in the end of the
financial year or in the end of the year which shows their financial health.
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Current asset, non-current asset, fixed asset and many more are some of the
heads of the which are shown on the asset side of this statement and
inventory, plant and machinery, investment etc. came under these heads. On
the other hand, current liabilities, non-current liabilities are some of the heads
of this statement which are shown on the liabilities side and creditors bank
loans came under these heads. With the help of this statement the company
can effectively determined the availability of the cash and their ability to invest
in new task.
 Profit and loss account: -this is also being considered as the most important
financial statement because on the basis of this various types financial
statement are prepare. This is also mandatory for the organization to prepare
this statement. This statement is prepared in order to conclude the net profit
which are earned by the organization. Along with this, this statement also
determines the operating and non-operating expenses in a very effective
manner. These statements are prepared by the organization in the end of the
financial year and the net profit has been measured by subtracting all the cost
expenditure form the revenue. On the basis of this financial statements ratios
has calculated.
Usage of financial ratios: -
Ratio analysis may be defined as the method of evaluating the financial
position, profits and liquidity of the firm by comparing the line-item data from their
financial statement. These financial ratios play a very important role, the usage of
these ratios has been discussed below: -
 Comparison: -this is the most important uses of the financial ratios is to
analyze the financial position of the company with the other firm in the similar
market. By obtaining the financial ratios like profit/earnings from the
competitors and then compare it to the ratios of the company, assist the
management not only in identifying the marketing gaps but also helps in
examining its strengths, weakness and competitive advantage (Khairani and
Alfarisi, 2019). The information which is collected by the management from
the ratios helps them in formulating the strategies which improves the position
of the company in the market.
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 Trend line: - these financial ratios are also used by the management of the
company in order to see if there is a trend in the financial performance. Over
the large number of reporting periods the data is collected by the established
companies form the financial statement. The trend which is obtained by the
management of the company can be used by them not only in predicting the
future financial performance but also in identifying the any expected financial
turbulence.
 Operational efficiency: - the financial ratios analysis is also used by the
management of the company in determining the degree of operational
efficiency in managing the asset and liabilities. Inefficient use of assets like
land, building and motor vehicles result in expenses which are unnecessary in
nature and that need to be eliminated(Noja and et. al., 2021). These ratios
also assist the organization in determining that whether the financial
resources are effectively utilized or not.
Section 3: Using the template provided:
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1. Completing the Information on the ‘Business Review
Template (Ensure that you display your calculations for this
detail)
2. Using Excel producing an Income Statement for the Sample
Organisation (see Case Study)
This is included within appendix
3. Using Excel completing the Balance Sheet
7

8

4. Using the Case study information describing the profitability,
liquidity and efficiency of the company based on the results
of ratio analysis
Ratio analysis plays a very important role for the organization, as this assists
the organization in analyzing their monetary data in a very proper manner.
The analysis of the financial statements which are prepare by the finance
team of the company on yearly basis is very important because by doing this
the management can easily carried out the ratios and effectively determine
the relationship between the two variables (Khairani and Alfarisi, 2019). There
are various types of ratios which can be used by the organization in order to
determine its economic growth. In context to the given case , the content
which is related to the measurement of profitability, liquidity and efficiency has
been mentioned below: -
 Profitability Ratio: - this ratio assists an organization in determining the
efficiency to earn the profit on its revenues. In this profit can be measured in
various means such as operating, gross and net.
Analysis: -the above calculation analyze that the revenues of the firm is high in
comparison to the cost of sale which result in that company earn profit. These profits
assist the firm in expanding business operation in proper manner.
 Liquidity Ratio: - the ability of an organization to pay its debt obligation is
measures by this ratio. It also assists the firm in understanding the availability
of cash within the business.
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Analysis: - the above calculations analyze that it is simple for the organization to
pay its short-term loans (Zhou and et. al., 2018) . It has been observed that the lots
of opportunities is occupying by the business to pay off the debts in small
installments. Despite form this, the time which take by the organization in paying its
loans is practically the same. The resource sales proportion is around 1.23 which
represents that the management of the company is spending its resources in a very
effective manner which ultimately support its business.
 Effective ratio: -with the help of this ratio the organization are able to
identifying that how their proficient ratios utilize all the ratios in effective
manner. This result in that the profits of the company has been enhanced.
Along with this the capability of the organization of raising the fund form the
market has also been determined.
Analysis: - based on the results obtained from the above compution it has been
analysed that 1.23 is tha asset turnover ratio of the organisation. Form the
management point of view this is very good. The company received the paymenrts
form their debtors in around 51 days and paid to the supplier in around 52 days
which is also excellent from management point of view.
Section 4: Using examples from the case study describing
and discussing the processes this business might use to
improve their financial performance.
The ratios which are calculated above not only assist the management of the
company in analyzing their productivity but also help them in determining their
performance in a very proper manner (PURA, 2019.) Along with this the investors of
the company are able to make the decision in proper manner with the help of
profitability, efficiency and solvency ratios. These ratios also assist the organization
in various ways like on the bases of these ratios they are able to make the strategies
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which help them in facing future uncertainties and also enjoy the long-term
sustainability.
The management effectively understand the needs of company which result in
improving their financial performance and along with this liquidity, position and
values can also been determined by studying various techniques. All the expenses
which are done by the company is clearly visible and effectively determined. Asset
are not used for a long period of time and the depreciation which are made on the
asset decrease the last advantage (Besri, 2018).
Conclusion
From the above report it has been concluded that finance team of the
company prepare the financial statement and it is the responsibility of the finance
department to prepare all in a very proper manner. These financial statements
assist the organization can effectively allocate the funds. Along with this, different
types of financial ideas have been generated within the management which assist in
proper decision making. Different types of financial ratios has been concluded in this
report which help in determining the financial position in the market.
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References
Spearman, K., 2019. Financial management for local government (Vol. 1).
Routledge.
Naranjee, N., Sibiya, M.N. and Ngxongo, T.S.P., 2019. Development of a financial
management competency framework for Nurse Managers in public health care
organisations in the province of KwaZulu-Natal, South Africa. International Journal of
Africa Nursing Sciences, 11, p.100154.
Wiharno, H., 2018. Pengaruh Financial Knowledge, Financial Behavior dan Financial
Attitude Terhadap Personal Financial Management. Jurnal Riset Keuangan dan
Akuntansi, 4(1).
Boma, P.B., 2018. Financial management and practices for principals on quality
service delivery in secondary schools Rivers State. International Journal of
Innovative Finance and Economics Research, 6(2), pp.62-69.
Khairani, F. and Alfarisi, M.F., 2019. Analisis pengaruh financial attitude, financial
knowledge, pendidikan orang tua dan parental income terhadap financial
management behavior pada mahasiswa s1 universitas andalas padang. Jurnal
Ilmiah Mahasiswa Ekonomi Manajemen, 4(1), pp.172-183.
Khairani, F. and Alfarisi, M.F., 2019. Analisis pengaruh financial attitude, financial
knowledge, pendidikan orang tua dan parental income terhadap financial
management behavior pada mahasiswa s1 universitas andalas padang. Jurnal
Ilmiah Mahasiswa Ekonomi Manajemen, 4(1), pp.172-183.
Zhou, F and et. al., 2018. Research of Financial Management System Based on
Intelligent Age. In Proceedings: the 4th International Conference on Education,
Management and Information Technology (ICEMIT 2018) (pp. 1265-1286).
PURA, R., 2019. Effect of competence of human resources and application of village
based financial system on performance of village financial management. Qualitative
and Quantitative Research Review, 4(1), pp.192-205.
Besri, A.A.O., 2018. Pengaruh Financial Attitude, Financial Knowledge Dan Locus Of
Control Terhadap Financial Management Behavior Mahasiswa S-1 Fakultas
Ekonomi Universitas Islam Indonesia Yogyakarta.
Noja, G.G and et. al., 2021. The interplay between board characteristics, financial
performance, and risk management disclosure in the financial services sector: new
empirical evidence from Europe. Journal of Risk and Financial Management, 14(2),
p.79.
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Appendix:
Income Statement
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