Importance of Financial Management and Use of Ratios in Financial Analysis

BMP3005

Contents
INTRODUCTION...........................................................................................................................3
TASK...............................................................................................................................................3
Section 1:................................................................................................................................3
Concept and Importance of financial management: -........................................................3
Section 2:................................................................................................................................5
Main financial statements and use of ratios in financial management: -...........................5
Section 3:................................................................................................................................6
The following is the completed information in business review template: -...........................6
2.Income Statement (Refer Appendix Below)...................................................................7
3. Statement of financial Position (Refer Appendix Below).............................................7
4. Profitability ratio, Efficiency ratio and liquidity ratio: -................................................7
Section 4.................................................................................................................................9
Recommendation...............................................................................................................9
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................11
APPENDIX....................................................................................................................................12

INTRODUCTION
Financial management is a process of dealing with management of finance in an organisation.
Acquisition of funds through various sources and utilising those resources in an efficient manner
is the key task for an entity (Bist, 2018). In other words, it can be said that applying principles of
management helps in effective and efficient utilisation of financial resources which helps in
achieving goals and objectives of business. In this report concept and importance of financial
management has been explained. Further it reflects financial statement types and use of ratios in
financial management. This report includes preparation of income statement, statement of
financial position and ratio analysis considering the profitability, liquidity and efficiency of an
organisation.
TASK
Section 1:
Concept and Importance of financial management: -
Financial management is important part of business because in order to start the same one must
possess excellent knowledge of financial management to make activities profitable. It involves
planning, directing, organising and controlling financial undertaking of an organisation (Dionne,
Chun, and Triki, 2019).
Further financial management in any business units in handled by a finance manager who heads
financial management department of an enterprise. Such department is responsible for the
following functions such as: -
 Calculation of capital required in business.
 Formation of capital structure in form of equity and debt.
 Investing funds of firm in safe and profitable ventures
 Allocation of profits of business effectively and efficiently.
 Effective management of company’s resources and establishing proper financial control.
Financial management plays an important role in business organisation by planning and
controlling business activity’s which helps in generating profits and keep the entity away from

bankruptcy. It is important is industries wise also such as civil industry, construction industry,
tourism industry, food industry etc.
The importance can be broadly list out as under: -
 Financial planning: It helps in deciding financial necessity associated with the business
concern. Further it ensures that prompt and corrective measures have been taken with
respect to business to mitigate last stage worries at the end of financial years (Guevara,
Martín, and Arcas, 2021). Financial planning considers crucial and critical areas of
business so as to ensure their effective support in working cycle. The success and failure
of firm completely depends upon effective financial planning.
 Safeguarding and protection of business funds: It helps in proper allocation of funds so
that maximum output can be generated. When in any business a finance manager make
use of these funds appropriately and allocate them wisely then in helps in reducing
business expenses of an organisation and increase the capital of firm.
 Creates investment opportunities for entity: There is famous saying that if an individual is
in managing finance then he will get opportunities to explore investment. Investment
opportunities creates wealth for an organisation so that in helps in maintaining
sustainability for an enterprise during a long run. There are lot of investment
opportunities by ways of investment in mutual funds, various stocks, in commercial
properties, golds etc. for a concern that multiplies their profit (Ullah, and Yusheng,
2020).
 Valuation of enterprise: Financial planning builds a strong base for an organisation by
enlarging business geographically also. Financial planning increase the production of
firm with corresponding expansion of business to other countries also that ultimately
increase valuation of enterprise.
 Tax planning and management: Financial planning also includes tax planning that is
important part of an organisation. Tax management is important because if not planned
properly then firm has to pay to government more tax that ultimately affects profitability
of business unit.