Importance of Financial Management and Use of Ratios in Financial Management

This article discusses the importance of financial management, the key financial statements, and the use of ratios in financial management. It covers profitability, liquidity, and efficiency ratios, and how to improve an organization's financial performance. The article also includes a section on completing a business review template. The subject is Applied Business Finance, and the course code is not mentioned. The article is relevant to students studying business and finance in any college or university.

Applied business
finance

Contents
INTRODUCTION.....................................................................................................................................3
Section 1: Defines and discusses the notion of financial management, as well as its
importance.......................................................................................................................................3
Section 2: The key financial statements are described and discussed, and the use of ratios in
financial management is explained.................................................................................................4
Section 3: Using the template provided completing information on “Business Review
Template”.........................................................................................................................................6
Section 4 discusses how to improve an organization's financial performance..........................10
CONCLUSION.......................................................................................................................................10
References:..........................................................................................................................................11
Appendix.............................................................................................................................................12

INTRODUCTION
Any action that deals with an organization's funds, such as investing, banking, crediting,
and saving, is referred to as finance. A strategy plan for regulating and directing money held
by an organisation and used in a productive operation is referred to as financial management.
The financial accounts and other statements are prepared to determine the organization's
performance and position over a set period of time. For the evaluation, the specialists utilise a
variety of techniques such as ratio analysis, comparison remarks, and numbers that may be
compared to previous results or those of competitors (Arthur, J. and Moody, L., 2018). The
report is broken down into four parts. The first section covers the necessity of financial
management. Financial statements and the usage of ratios in organisations are covered in the
second section. The final section discusses the examination of the company template and its
position using ratio analysis. The fourth section is about the processes that can be used to
improve business performance.
Section 1: Defines and discusses the notion of financial management, as
well as its importance.
Financial management is a crucial activity for a company since it deals with the
calculation and management of expenses, sales, profits, and cash flow. A corporation's
financial resources are managed and directed toward attaining company goals, which also
aids in the maximizing of stakeholder value. This is a form of short-term working capital that
concentrates on current assets and liabilities. The process of planning, organising, directing,
and controlling accounting duties such as resource purchase and utilisation is referred to as
financial management. The cash is earned by the business, and the capital is raised from
lenders or investors. This also helps to guarantee that sufficient finances are available. In the
past, the financial administration was solely concerned with the collection of funds
(Benlemlih and et.al., 2018). From today's standpoint, it's all about making the best use of
resources in order to fulfil the company's objectives. Capital budgeting, capital structure,
working capital management, and other functions are included. The finance manager is the
most crucial component in the organisation, contributing significantly to all business
activities. It calculates the amount of money needed and suggests several funding options. In
respect to the company's monetary activities, the finance manager must be clear about the
financial goals, tasks, and responsibilities.
Importance of financial management-

Finance is an elixir of life for an organisation, and good management is required to earn
money. The Fund's investments in fixed assets and working capital can be successfully
monitored with the help of financial management, which is critical:
 Financial Planning - This is an important part of management because it determines
and leads to financial planning for any business-related financial needs. It also aids in
the achievement of the promotion of a company's success.
 Safeguarding and protecting funds- It is critical in accomplishing organisational
goals through safeguarding financial resources. The areas where money is needed and
allocated in an appropriate manner are measured in order for the firm to run smoothly.
 Optimum utilization of funds- The proper utilisation and allocation of funds
improves the company's operating efficiency. The finance manager's proper use of
cash will minimise the cost of capital and raise the company's worth (Bouteska, A.,
2019).
 Financial decision- It aids in the making of sound financial decisions in the
workplace that have an impact on the individual's entire organisation. It has a direct
line of communication with all company departments, including production,
marketing, and so on.
 Increase in firm value- The importance of financial management contributes to the
growth of investor wealth and the efficiency of business operations. Finally, it aids in
achieving maximum profit, resulting in increased wealth for both investors and the
nation.
 Improving Profitability- The efficacy and proper utilisation of finances are
completely dependent on the organization's profitability. Strong controlling
instruments such as budget control, key figure analysis, and cost-volume-profit
analysis are used to improve the profitability condition in the firm (Hilal, F.B.M. and
Jamaludin, N.F.B., 2019).
Section 2: The key financial statements are described and discussed, and
the use of ratios in financial management is explained.
A summary report of earned profits, cash flow, performance, and position over a set time
period, usually one fiscal year, is referred to as financial statements. The financial statement
includes a detailed summary of all expenses incurred, income received, and asset and liability
balances. All necessary information is supplied in a well-structured fashion, allowing users to

read these statements with ease. This aids outside parties and management in making a
variety of financial decisions.
The Types of financial statements are discussed below-
 Balance sheet- It is one of the most essential yearly financial statements since it
summarises a company's assets, liabilities, and equity throughout the course of a fiscal
year and aids in the recording of its financial performance. It is based on the following
formula:
Assets = Liabilities + Shareholders' Equity
According to the equation above, the sum of one side must equal the balance of the other
side. Depending on the preferences of the firm and the accounting regulations of the country,
this report can be presented in both horizontal and vertical formats. Based on their usable life
and liquidity position, both sides are further split into two categories: short term and long
term. Long-term assets and liabilities are those that are held for more than a year and are
useful in the day-to-day operations of the company (Jennings and et.al., 2019). They cannot
be converted into cash in a short period of time. Short-term ones, on the other hand, are
usually and must be realised within the fiscal year in order to improve corporate growth.
They arise as a result of the company's day-to-day operations. For instance, cash, accounts
receivable, accounts payable, and so on.
 Income statement- It is a summary of all a company's expenses and income over a
specific time period, as well as the results of its activities. This account is also known
as the profit and loss account since it shows a company's gains and losses throughout
and at the end of its business activity. The following is the calculating formula:
Income = Income - Expenses
It is split into two sections. The first area of business is focused with direct company
operations, such as sales, cost of goods sold, and related fees. The remainder of this section is
accounted for as gross profit or loss. Then it's on to the following section, which covers all of
the indirect costs and profits (Rohde and et.al., 2018). How to get a discount on power, rent,
and other expenses. The net profit / loss is then calculated by subtracting the net balance from
the gross profit. This is the final profit, which is utilised to pay taxes and distribute to
shareholders.

 Cash flow statement- It's a financial statement that shows how much money has
moved in and out of a company over a given period of time. This report acts as a
barometer of a company's ability to effectively allocate its resources. It is involved in
three different sorts of activities:
o Operating activities- The sources and uses of finances for performing
commercial activities and selling products or services are referred to as
operating activities. They deal with the day-to-day operations of the company,
such as payables, receivables, inventories, and wages, among other things.
o Investing activities- The sources and uses of funds from firm investments for
the long-term future are included in the investing activities. They are in charge
of the company's day-to-day operations, including payables, receivables,
inventories, and payroll, among other things (Mader and et.al., 2018).
o Financing activities- Funding operations include cash from investors or
banks, as well as cash paid to shareholders. It includes all actions done by
businesses to raise capital, such as the issuance of stocks and bonds, as well as
loans. Interest, dividends, and stock repayments are all included in this
category.
Use of accounting ratios in managing finance
It is a set of metrics that organisations use to calculate their profitability and
efficiency. It establishes a link between the two balance sheet items and the profit and loss
account, and then interprets the data using the ideal basis that was created specifically for this
purpose. The findings are also compared to previous reports or those of rivals to analyse the
performance of their position over the last year or against other companies in the same
industry. These indicators can be used to estimate future trends in a variety of ways. -
External users, such as investors and creditors, utilise historical data to forecast future
patterns and make financial decisions (Nielsen, H. and Kristensen, T.B., 2020). A successful
or steady run provides the company with a competitive advantage. It also assists with other
decisions such as cost-cutting, marketing improvements, and so on. If these measures reflect
a decreasing trend, the management team explores the causes and develops initiatives to
reverse the trend.

Section 3: Using the template provided completing information on “Business
Review Template”
The Net Profit for the year 2016, is £ 43,057,000 (2015: £18,987,000).

Calculations-
1)Using Excel producing an Income Statement for the Sample Organisation
This is covered in appendix
2) Using Excel completing the Balance Sheet
This is covered in appendix
3) Describing profitability, liquidity and efficiency of company based on ratio analysis
 Profitability ratio- This ratio assesses a company's ability to generate profit from its
revenue, and the higher the ratio, the better.
◦ Net profit margin= Net Profit/sales
 Gross profit margin= Net Profit/sales

The company's profits rise mostly as a result of the above ratios. In 2015, the net profit was
10.57 percent, while in 2016, it was 22.36 percent (Phan and et.al., 2019). This is a good sign
of progress. While gross profit has declined marginally, this could be because manufacturing
profit has increased. But still the net income has risen sharply.
 Liquidity Ratio- These aids in determining whether the company is able to meet
present liabilities using short-term assets.
The liquidity of the corporation is also rather good. All of the company's short-
term liabilities are covered by its assets. Even after all existing debts are paid, certain
assets will be left over to run the business on a day-to-day basis.
 Efficiency metrics- It aids in defining the company's operational and management
capabilities. It also calculates how long it will take to convert sales into cash.

Section 4 discusses how to improve an organization's financial performance.
Accounting metrics are only valuable if they are used to help businesses improve their
performance. This can be accomplished by identifying any expenses that are unnecessary and
do not bring value to the company's profitability (Pradhan, R.P and et.al., 2019.). It should
also concentrate on enhancing its marketing strategies in order to boost sales even more. By
modifying its collections strategy and recognising assets that are not worthy of the firm, the
company's finance department can also play an essential role in enhancing the organization's
health.
CONCLUSION
Financial management is a highly crucial component of running business for planning
and controlling the funds of the business, as seen in the preceding report. It analyses the
company's performance using financial statements. To do so, the manager evaluates the role
using accounting metrics. External parties utilise its results to make accounting judgments.

References:
Books and Journals
Arthur, J. and Moody, L., 2018. Building a Resilient Organisation: The Design of Risk-
Based Reasoning Chains in Large Distributed Organisations. Routledge.
Benlemlih and et.al., 2018. Does it really pay to do better? Exploring the financial effects of
changes in CSR ratings. Applied Economics, 50(51), pp.5464-5482.
Bouteska, A., 2019. Some evidence from a principal component approach to measure a new
investor sentiment index in the Tunisian stock market. Managerial Finance.
Hilal, F.B.M. and Jamaludin, N.F.B., 2019. Smart Contract in Islamic Trade Finance.
In Contemporary Management and Science Issues in the Halal Industry (pp. 431-
437). Springer, Singapore.
Jennings and et.al., 2019. Orthopaedic surgery resident financial literacy: an assessment of
knowledge in debt, investment, and retirement savings. The American Surgeon, 85(4),
pp.353-358.
Mader and et.al., 2018. Restoring trust in government through transparency by using
accounting and enforcing accountability. The Journal of Government Financial
Management, 67(3), pp.42-47.
Nielsen, H. and Kristensen, T.B., 2020. Impact of lean operations on the roles of finance
functions and their application of lean. European Business Review.
Phan and et.al., 2019. Segmentation of financial clients by attitudes and
behavior. International Journal of Bank Marketing.
Pradhan, R.P and et.al., 2019. The nexus between economic growth, stock market depth,
trade openness, and foreign direct investment: the case of ASEAN countries. The
Singapore Economic Review, 64(03), pp.461-493.
Rohde and et.al., 2018. Competing by investments or efficiency? Exploring financial and
sporting efficiency of club ownership structures in European football. Sport
Management Review, 21(5), pp.563-581.

Appendix
Income statement
Balance sheet