Importance of Financial Management and Use of Ratios in Financial Management

This article discusses the concept and importance of financial management, the main financial statements, and the use of ratios in financial management. It also provides examples of processes that businesses might use to improve their financial performance.

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
Section 1: Definition and discussion of the concept and
importance of financial management
Section 2: Description and discussion of the main financial
statements and explain the use of ratios in financial
management
Section 3: Using the template provided
i. Completing the Information on the ‘Business Review Template
(Ensure that you display your calculations for this detail)
ii. Using Excel producing an Income Statement for the Sample
Organisation (see Case Study). This should be included within
your appendices
iii. Using Excel completing the Balance Sheet
iv. Using the Case study information describing the profitability,
liquidity and efficiency of the company based on the results of
ratio analysis
Section 4: Using examples from the case study describing
and discussing the processes this business might use to
improve their financial performance
Conclusion
References
Appendix

Introduction
Financial management is one of the most important aspect of a business
enterprises. It refers to the planning, organizing, controlling and directing financial
undertakings of a company. It is important for a company to manage their financial records
carefully as financial records are the documents through which the company can describe
their funds allocation and can state the financial position to the stakeholders of the
company (Yang and et. al., 2020.). Financial management refers to the management of
the funds of the company which helps the company in ensuring the continuous supply of
funds and ensures that the stakeholders will get good returns on their investments. The
ratios of the institution also helps the company in examine their position in the market also
analyzing the short term liquidity position of the company. It helps the establishment in
analyzing the resources of the company with the help of ratios and will also make sure
that the assets of the company are able to pay the short term obligations of the company.
Section 1: Definition and discussion of the concept and
importance of financial management
Financial management refers to the utilization of general management principles
on the financial resources of a company. One of the most essential aspect of financial
management is budgeting. It is important for the establishment to make sure that they are
allocating their funds in right manner and the funds of the company are not getting
wasted. In order to allocate the funds properly the company incorporates finance
department which helps the company in managing their financial undertaking and after
proper analysis will allocate the funds of the company in different departments (Dale.,
2018.). The master budget of the company includes financial records of the company
such as income and expenses, cash flow statement, balance sheet and profit and loss
statement. It is important for the company to allocate their funds properly so that their is
no interruptions in the workings of the company. Some of the important aspect of
financial management is given below:
Smooth running of an enterprises: Funds are one of the major factors that
helps the company in avoiding disruptions in the workings of the company. It is important
for eh companies to make sure that the finance department of the company is working
efficiently and effectively so that the company will not have to suffer from lack of funds.

Quick decision making: The finance department of the company will be able to
provide the real time situation of the company with the help of facts and figures which is
important for the company in order to take any decision (Kiliyanni and Sivaraman.,
2018.). This will help the company in taking decision quickly and without wasting any
time.
Proper coordination between various departments: Financial management will
help the companies in having proper coordination in between the departments of the
company. It will help the company in managing their department as well as their funds
effectively and efficiently. It is important for the company to make sure that proper and
adequate funds are provided to the departments of the company and financial
management will make sure that the funds of the company are not getting wasted.
Measures the performance: Financial management will help the company in
measuring the performance of the company properly. It will provide records to the
stakeholders of the company so that they will get satisfied with the allocation of funds (Al
Mubarak., 2020.). It will help in analyzing the performance of the company so far and will
also help in analyzing what is working in favor of the company and what is not working in
the favor of the company.
Section 2: Description and discussion of the main financial
statements and explain the use of ratios in financial
management
Balance sheet: It refers to the financial document of the company which provides
detailed information about the assets and liabilities of the company. It is important for the
company to analyze the assets and liabilities of the company so that they have a proper
knowledge about the financial position of the company. Assets include the things that the
company owns and has some value in terms of money. On the other side liabilities are
the amount of money that the company owes to other. These are the obligations that the
company have to pay and includes bank loans, borrowed money, unpaid rents, etc. the
balance sheet includes shareholder's equity which is the capital or net worth of the
company (Santis, Grossi and Bisogno., 2019.). It refers to the fact that if all the asses of
the company is sold out and the liabilities are paid by the cash then the leftover or the
remaining cash will belong to or will be distributed to the shareholders of the company as
a full and final settlement of the investments made by them. Balance sheet is one of the
most important financial record of the company which the company provides to the

stakeholders of the company. The balance sheet must be equal in amount from both the
assets and the liabilities side.
Income statements: It refers to the statement which tells the company about the
revenue that the company has earned in a specific period of time. The income statement
of the company also shows the costs and expenses incurred by the company in order to
earn those profits so that the calculations can be made. The bottom line of the income
statement display how much a company has earned or lost in a particular period of time.
The income statement helps the company and the stakeholders in analyzing the earning
per share of the shareholders which can also display the financial position of the
company (La Rocca and Cambrea., 2019.). At the very first of the income statement the
sales made by the company throughout the period is specified and after that all the costs
incurred by the company will be specified so that the company will be able to analyze the
final profit or loss of the company. The sales given in the statement is referred to as
gross sales as there is no deduction of costs has been made. The expenses of the
company is further divided into fixed cost and variable cost in order to get the correct
financial position of the company.
Cash flow statement: It refers to the statement that tells the company about the
inflow and outflow of the cash. The statement helps the company in analyzing the
allocation of cash funds of the company in the different departments or working of the
company. It is important for the institution to make sure that they have enough cash to
operate smoothly and to make sure that there is no disruptions in the workings of the
company due to lack of funds. It is important for the company to have a proper
knowledge about the funds of the company. The balance sheet and the income
statement helps the cash flow statement to gather information about the funding s of the
company. The cash flow of the company is divided into three important sections which is
operating activities, investing activities and financing activities. In simple terms the cash
flow statement of the company states the net increase and decrease of cash of a
company in a certain or specific period of time (Eng, Lin and Neiva de Figueiredo.,
2019.). The operating activities of the company reconciles the actual cash received by
the company with the net income of the company so that non cash incomes of the
company can be adjusted. Investing activities of the company shows the purchases or
sales of some long term assets of the company which is having an impact on the cash
flow of the company. If the company purchases a long term asset then it will refers to as
cash outflow whereas if the company sells any asset of the company then it will be stated

as inflow of cash. And lastly, financing activities of the company includes typical cash
flows of the company such as cash raised by the company by selling the stocks or cash
inflow because of borrowing from a bank, etc.
Financial ratios are also an important part of financial management of a company.
Financial ratios helps the company in decision making and will provide the actual position
of the company in terms of finances. Ratios helps the company in analyzing their
profitability, operational efficiency and liquidity along with the solvency of the company.
Some of the major benefits of financial ratios are given below:
 Compare financial results with competitors: It is important for the business to
make sure that they are ahead of their competitors and to be aware of the workings
of the competition (Migliavacca., 2020.). The ratio analysis of the company helps
them in comparing their financial position with the financial position of the
competitors. It helps the company in determining the strategies and the financial
management of the competitors. With the help of ratios the company can analyze
the working capital as well as the assets and liabilities of the competitors.
 Helps in identifying problematic or weak areas: The financial ratios helps the
company in analyzing the weak points and the strong points of the company in
terms of finances. It is important for the company to make sure that they are
working in the correct direction and changes have been made in the needed areas.
The financial ratios of the company helps them in analyzing the problem and
making changes according to the funds and finances of the company. It is
important for the company to have a proper knowledge about the funding and the
finances of the company and financial ratios presents a clear picture about the
same.
 Helps in quick decision making in regards to the finances of the company: As
the clear picture about the finances of the company is already present, it assist the
company in making quick decision and will also helps the company in better
decision making (Montalto and et. al., 2019.). It is important for the company to
have full information so that accurate decisions can be made and the quick
decisions can be made in the times of emergency so that the workings of the
company does not get discontinued or disturbed.
 Helps in attracting potential investors: As the ratios shows the capacity of the
company to pay their obligations and also provide a clear picture about the

operational efficiency of the company, it helps the investors in making decisions
regarding their investment. The investors invest their money in the options which
they feel the most beneficial for them or which can provide highest returns to them.
If the ratios of the company are providing a good position of the company then the
investors will surely invest their money in the company.
Section 3: Description and discussion of the main financial
statements and explain the use of ratios in financial
management
1. Income statement
Balance sheet.

Section 4: Using examples from the case study describing
and discussing the processes this business might use to
improve their financial performance.
There are various types of ratios which can help the company in improving their
performance and will also help in analyzing their financial position.
 Quick ratio: It refers to the ratio which helps the company in analyzing the short
term liquidity position of the company and will help the organisation in analyzing the
ability to meet the short term obligations of the company. It helps the company in
gathering the information about the most liquid assets of the company which can be
used at the time of emergency funds requirements (Oshodi and et. al., 2019.).
Liquid assets are the assets that can be quickly turned into cash by the company as
and when needed. It refers to the assets that are available in comparison to the
liabilities of the company. The higher the result of the ratio will be the better the
capacity of the company will be to pay liabilities. Quick ratio is a smaller measure of
current ration as it only includes the high liquidity assets of the company.
Quick ratio = (Current assets – inventory) / current liabilities
= (84349 – 28571) / 37928
= 1.47: 1
 Gross profit ratio: The organization's gross profit ratio states how the resources of
the company is getting utilized. It is a useful measure which helps the company in
analyzing the execution and efficiency of a business by dividing the figures of gross
profit with the figures of net sales. It is important for the company to make sure that
their resources are getting utilized effectively otherwise the company will not be
able to have full benefits of the workings that they are doing. The importance of this
ratio is that it tells the potential investors about the efficient management of the
processes of the company by keeping the costs minimum and by earning highest
possible profits.
Gross profit margin= 81125 / 189711 * 100
= 42.76%
 Working capital ratio: The ratio defines the knowledge of the company to pay its
obligations. It is a relative proportion of the company's current assets and current
liabilities (Aras., 2018.). If the working capital ration of a company is below 1.0 then
there is strong possibility that the company may have to face liquidity problems in

the future whereas if the ratio is above 1.0 then it indicates that the company have
a good short term liquidity. This is the ratio which helps the lenders to analyze
whether they should lend funds to the company or not.
Working capital ratio= current assets – current liabilities
= 54349 – 37928
= 16421
 Current ratio: The current ratio of the company helps in analysing the power of the
company to pay its short term liabilities or obligations with the help of current assets
of the company such as cash, receivable and inventory (Mestry., 2018.). The ratio
states the solvency of the company as if the ratio of the company is below 1 then
the company will face problems in meeting its short term liabilities whereas if the
ratio of the company is above one then the company is having surplus assets to
meet its short term oblige.
Current ratio = Current assets / current liabilities
= 54349 / 37928
= 2.22:1
Conclusion
From the above report it is concluded that financial management is an important
task for an organization. It is important for the company to manage their finances properly
as funds are one of the major resource of the company. Finances of the company is
needed to be managed properly as the investments is made by the shareholders of the
company and they have a close check on the activities of the company. The ratios of the
company also have an important role in the analysis of the liquidity of the company. It
helps the company in attracting potential investors which is beneficial for the company.

References
Books and journal
Al Mubarak, M.M.S., 2020. The relationship between corporate governance and stock
prices in the GCC financial markets. Corporate Ownership & Control, 17(2),
pp.57-64.
Aras, G., 2018. Governance of Financial Institutions. In Oxford Research Encyclopedia of
Business and Management.
Dale, E.J., 2018. Financial management and charitable giving in gay and lesbian
households. Nonprofit and Voluntary Sector Quarterly, 47(4), pp.836-855.
Eng, L.L., Lin, J. and Neiva de Figueiredo, J., 2019. International Financial Reporting
Standards adoption and information quality: evidence from Brazil. Journal of
International Financial Management & Accounting, 30(1), pp.5-29.
Kiliyanni, A.L. and Sivaraman, S., 2018. A predictive model for financial literacy among the
educated youth in Kerala, India. Journal of social service research, 44(4), pp.537-
547.
La Rocca, M. and Cambrea, D.R., 2019. The effect of cash holdings on firm performance
in large Italian companies. Journal of International Financial Management &
Accounting, 30(1), pp.30-59.
Mestry, R., 2018. The role of governing bodies in the management of financial resources
in South African no-fee public schools. Educational Management Administration &
Leadership, 46(3), pp.385-400.
Migliavacca, M., 2020. Keep your customer knowledgeable: financial advisors as
educators. The European Journal of Finance, 26(4-5), pp.402-419.
Montalto and et. al., 2019. College student financial wellness: Student loans and
beyond. Journal of Family and Economic Issues, 40(1), pp.3-21.
Oshodi and et. al., 2019. Using neural network model to estimate the rental price of
residential properties. Journal of Financial Management of Property and
Construction.
Santis, S., Grossi, G. and Bisogno, M., 2019. Drivers for the voluntary adoption of
consolidated financial statements in local governments. Public Money &
Management, 39(8), pp.534-543.
Yang and et. al., 2020. Systemic importance of financial institutions: A complex network
perspective. Physica A: Statistical Mechanics and its Applications, 545, p.123448.

Appendix:
Income Statement