Importance of Financial Management: Significance, Ratios, and Ways to Improve Performance

This article discusses the importance of financial management, including its significance, different ratios to keep in mind, and ways to improve financial performance. It also includes a section on the analysis of a company's financial performance. The subject is financial management, and no specific course code or college/university is mentioned.

Importance of
Financial
Management

Table of Contents
INTRODUCTION...........................................................................................................................1
SECTION 1......................................................................................................................................1
SECTION 2......................................................................................................................................2
Section 3...........................................................................................................................................5
Section 4...........................................................................................................................................6
Ways to improve their financial performance........................................................................6
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8
Calculations....................................................................................................................................12

INTRODUCTION
Fiscal administration can be described as thinking, organising, leading and controlling
various fiscal activities such as utilisation or procurement of the monetary resource of an
organisation. When a manager drafts a solid financial plan, it enables him to provide the data that
supports the long range vision of an organisation, also informs where to invest at what amount
and yields comprehension, liquidity, profitability, cash flows and much more. Financial
management can also be described in simple word as analysing and dealing with money and
investments for a person or a business to help in business decision. These days financial
management is also known by the terms corporate finance or business finance cause an
organisation or corporate sectors are unable to role without the value of the fiscal administration.
SECTION 1
Financial administration is the domain or function in an enterprise that focuses on the
gainfulness, disbursement, currency, credit or investments so as to an organisation can efficiently
achieve its target with the desired outcome as possible. The main objective should be for a
finance manager to focus on maximising the value of an organisation for the sake of
stakeholders(Fatihudin, 2018).
Everyone needs to be aware to the fact that for the smooth functioning of any organisation,
finance is the lifeblood. Each and every organisation need to maintain enough amount of funds to
meet the variety of needs of a business organization. Thus, it cannot deny an importance of
finance in business concern at any cost.
The following are the significance of the Financial Management :
1. Helps organisation in monetary planning : the fiscal manager evaluates how much
money they will need in order to maintain the positive cash flow of a project, also
allocate the funds to add new products and services and to grow the business and cope
with the various unexpected events, and transfer all these information with the higher
authorities of an organisation.
2. Helps organisation in the planning and acquisition of funds : financial management
helps an organisation in acquisition of required finance. Acquiring the enough funds
which are required in the business demonstrate a leading component in fiscal
administration cause it refers the achievable origin of finance at minimal cost.
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3. Helps organisation in efficaciously utilising and apportion the funds accepted or
acquired : through effective financial management planning people can appropriate
utilization and allocation of monetary resource which will lead to change the functional
efficiency of an organisation. Since a finance administrator utilizes the funds efficiently,
he can minimise the cost of capital and can also increase the worth of an organisation.
4. Assists organisations in making critical monetary determination : fiscal
administration provide an assistance to an organisation to take secure financial
determination. In various departments of an organisation have direct relationship such as
marketing, production personnel, sales, finance and etc. that is why the financial decision
taken by the finance manager affects the entire operation of an organisation (Giambona
and et. al., 2018).
5. Helps in improving the profitability of organisation : profitability of an organisation
mainly depends on how efficiently and properly a finance manager utilises the funds.
Financial management helps the organisation to increase the profitability position by
powerful monetary control on inclination like budgetary control, ratio analysis and cost
volume profit analysis.
6. Increases the overall value of the firms or organisations : fiscal administration
demonstrate a crucial function in the piece of ground of increasing the wealth of different
stakeholders as well as value of an organisation. The ultimate target of a business concern
is to maximise the profit and the through higher profitability a finance manager maximize
the wealth of all the investors and also contribute to build the economy.
7. Encourage employees to save money, which helps them in personal financial
planning : if there is an effective management in an organisation it will helps in
promoting and mobilising individuals efforts and corporate savings. And the funds are
only realizable when an enterprise units earn high profit and maximising the financial
condition of their stakeholders.
SECTION 2
The foundational information of corporate accounting can be derived from the financial
statements of an organisation. This data can help the administration, capitalist and lenders to
evaluate the financial position of a company. The various data found in the income statements,
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cash flow and balance sheet are used in calculating the important financial ratios that helps to
identify the organisation's execution and possible issues that need to be resolved . A variety of
information which income statements, cash flow and balance sheet provide are interconnected
with each other. And all these statements together provide a across-the-board picture of the
organisation's operational activities.
An Income Statement : through an organisation's income statement w people come to know
about the revenue an organisation realizes and a various disbursement participate in its operating
activities. In general, it renders much farinaceous details on the atomistic operational activities of
a organization. Consecutively, the financial statement shows the direct, indirect and capital
expenses which an organisation spends throughout a finance year.
The cash flow statements : financial income statement divide the analysis into three parts:
operating, investing, and financing activities and demonstrate the changes in balance sheet
accounts and financial gain statements affects the cash and cash equivalents (Maher and et. al.,
2020). A financial cash flow statement details the net alteration in the total cash in all of the
three categories. Generally, the financial income statement focuses on the flow of cash in and
cash out of the business. Being an analytical tool, statement of cash flow is helpful to get to
know the availability of the cash in the company for the smooth functioning.
The balance sheet : balance is one among the fundamental financial statements and is important
in accounting. Balance sheet displays the company's total possession and how the various assets
are supported, either by liability or assets. Everyone can also describe it as a statement of net
worth or a statements of financial position. The fundamental equation of the balance sheet is -
ASSETS = LIABILITIES + EQUITY
Use of financial ratios in the financial management
fiscal ratios are traced from the quantitative values taken from the financial statements (balance
sheet, income statement, cash flow statement) so that investors and analysts can evaluate the
fiscal health of an organisation. Through financial ratios, future performance can be estimated
easily by comparing the data that how the company is performing over time. Ratio analysis
measure a particular company on present based on the historical data, they evaluate securities
within an industry. One can say that the ratios are the comparison points for companies.
The various kind of financial ratio can be described as follows :
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1. Liquidity ratio : liquidity ratio mainly assess the capability of a particular organization
to repay it's short term debt when they become due. A manager can evaluate liquidity of
an organisation by looking at current asset or quick asset's data. Liquidity ratio further
can be categorised into current ratio, quick ratio and working capital ratio.
 Current ratio: Current Assets/Current Liabilities
Formula Calculation
Current Assets/Current Liabilities 54,549 / 57,928 = 2.22:1
2. Quick Ratio: Quick ratio/current liabilities
Formula Calculation
Quick ratio/current liabilities 84,349-2,571/37,928 = =1.47:1
3. Solvency ratio : through solvency ratio an analyst measure that whether the company
has capability of paying it's long term liability as well as interest on its liability or not and
also measures the amount of capital that comes from debt. Solvency ratio is also known
as financial leverage ratio. One can categories solvency ratio into debt-equity ratios, debt
to assets ratios and interest coverage ratios.
4. Profitability ratio : profitability ratio represents the ultimate result of a company i.e.
gainfulness an organisation. Through profitability ratio an analyst can measure that
whether the company has ability to generate the income while comparing it with the
expenditure and various other cost related to the generation of financial gain during the
financial year (Qiu and Xiao, 2020). Profitability ratio also shows that how owner's fund
are used to generate enough wealth for them. Return on equity, earning per share,
dividend per share, price earning ratio, return on capital employed, return on assets, gross
profit, net profit are the different ratios included in the profitability ratio.
 Net Profit Ratio: Gross profit/Net sales*100
Formula Calculation
Gross profit/Net sales*100 (2015): 18,987/179,587*100=10.57 %
(2016): 43,057/19,711*100 =22.69 %
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 Gross Profit Ratio:
Formula Calculation
Net profit/Net sales*100 (2015): 81,125/189,711*100=42.76%
(2016): 1650-675/6000*100= 16.25%
5. Efficiency ratio : through efficiency ratio an analyst can get to know how efficiently a
particular organisation is utilising its various resources, assets and liabilities to make sales
and maximising profits. It is also known as the activity ratios and it includes : turnover
ratio, inventory turnover and days sales in inventory ratios.
Sales Revenue per employee =Sales revenue /number of employee
Formula Calculation
Sales revenue / number of employee (2016) = 189,711/649=292
(2015) = 179.587/618= 290
6. Coverage ratio : capability ratio are used to analyse that the particular organisation has
capability to serve its financial obligations and debt like interest payments and liabilities
to pay back in the financial year. Net income, interest, total assets, unpaid liabilities and
etc. are the different factors are considered to evaluate coverage ratio. Higher the
coverage ratio for an organisation is always considered better (Tkachenko and et. al.,
2019). Coverage ratio further can be categorised as interest coverage ratio, debt service
coverage ratio and asset coverage ratio.
Section 3
Profitability of the company: through the analysis of the profitability ratio, it can evaluate that
the company is growing at very good pace. Since during the year 2016 its gross profit has grown
to 81125 from 80612 whereas its net profit has shown very good jump in 2016 that is 43057
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from 18987 in the last year. Also the shareholder's wealth has shown the 32.9% surge which is
good indicator from the company and also a good sign for the shareholders. (Refer to appendix)
Liquidity of the company : besides to the fact that the companies profitability has shown good
jump in the current year but the liquidity of the company has decreased in year 2016 as compared
to the year 2016. One can analyse this through the current ratio which sunken to 82% in the
current year and is 0.54 which was 4.14 in the last year which shows the company will face some
difficulty in meeting their short term cash requirement during the 2016 of the financial year.
(Refer to appendix)
Efficiency of the company : the activity ratio of the company has also grown in the current year
as the company has utilised its resources and assets in an efficient manner. The company's net
profit has increased from 18987 from last year to 43057 in current year. Besides this the
company's sales has also increased from 179587 in the last year to 189711 in the current year
which is a good significance. If the company shows the same kind of stability in the future they
will be able to achieve great heights but they also have to keep an eye on their liquidity ratio
which they cannot neglect to the fact that it sunk in the current year. (Refer to appendix)
Section 4
Ways to improve their financial performance
1. Consolidate debt : to improve the financial performance, finance manager has to look on
the short term debt of the company and it will be beneficial for him to consolidate it as
soon as possible. Company has also option to refinance its debt into single payment with
the lower interest rate (Susilowati and Latifah, 2017). With these company can increase
its current asset and decrease its current liabilities which will help the organisation to
maintain the current ratio as well as quick ratio
2. Recover outstanding payments : it might be possible that the company has too much
tide payment on the hands of their customer. If the company will be able to recover all the
outstanding payment from their debtors it can help to meet their different financial
requirement which on return can improve its liquidity ratio which is not good to help the
company to perform efficiently in the current year (Sujana and et. al., 2020).
2. Lower your expenses : this is one of the best alternative to improve the financial
performance of the company. The company need to check out whether they will be able
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to find cheaper alternates for suppliers, equipment and services. For the larger expenses,
the company should look for the periodic or deferred payments to keep more availability
of cash in their hands.
CONCLUSION
From the above report it can be concluded that proper financial management plays an important
role for a company to run smoothly cause without finance an organisation will not be able to
meet their various requirements. Why the financial management is important and what are
various ratios to keep in mind are also mentioned in the above report. When it is analysed the
different data given in the brief one came across that the companies profitability ratio and
efficient ratio were improved in the current year but the company has need to keep an eye on its
liquidity ratio. The company has to put efforts to improve its current ratio as well as quick ratio
in order to meet their short term and long term targets.
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REFERENCES
Books and Journals
Fatihudin, D., 2018. How measuring financial performance. International Journal of Civil
Engineering and Technology (IJCIET). 9(6). pp.553-557.
Giambona, E., and et. al., 2018. The theory and practice of corporate risk management: Evidence
from the field. Financial Management. 47(4). pp.783-832.
Maher, C.S., and et. al., 2020. Financial condition analysis: A key tool in the MPA curriculum.
Journal of Public Affairs Education. 26(1). pp.4-10.
Qiu, Y.L. and Xiao, G.F., 2020. Research on Cost Management Optimization of Financial
Sharing Center Based on RPA. Procedia Computer Science. 166. pp.115-119.
Sujana, E., and et. al. , 2020. Internal control systems and good village governance to achieve
quality village financial reports. International Journal of Innovation, Creativity and
Change. 12(9). pp.98-108.
Susilowati, N. and Latifah, L., 2017. College student financial behavior: An empirical study on
the mediating effect of attitude toward money. Advanced Science Letters. 23(8).
pp.7468-7472.
Tkachenko, V., and et. al., 2019. Development and effectiveness of financial potential
management of enterprises in modern conditions. Financial and credit activity: problems
of theory and practice.
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Appendix:
(1) Income Statement
(2)
Balance Sheet
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(3) Business Review Template
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Calculations
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