Financial Management and Use of Ratios for Improved Financial Performance

This report discusses the concept and importance of financial management, financial statements, and the use of ratios for improved financial performance. It also covers the processes that businesses can use to improve their financial performance. The subject is Applied Business Finance.

Applied Business Finance

Contents
INTRODUCTION...........................................................................................................................................3
SECTION 1....................................................................................................................................................3
Financial management and their importance..........................................................................................3
SECTION2.....................................................................................................................................................4
Financial statement and use of ratio.......................................................................................................4
SECTION 3....................................................................................................................................................5
Calculating ratios and explaining the interpretation ...............................................................................9
SECTION 4..................................................................................................................................................11
Discuss the process which business use for improve its financial performance:...................................11
CONCLUSION.............................................................................................................................................12

INTRODUCTION
The financial management is mainly concerned with the accounting component of a
company that aim at better management of finance and teach the effective and most conventional
ways for having effective handling of monetary funds and other financial resources (Strauch,
Dordi and Carter, 2020). Financial management may be described as the neighbourhood or
business organization but every department which is particularly worried with cash flow,
expenditure, money and lending, such that the "organisation may have had the capability to take
out its goal as adequately as potential;" the latter are described as maximising the performance of
the investment for shareholders. In current report, a discussion about the concept and importance
of financial management is provided along with evaluating the main financial statements.
Further, description about the profitability, liquidity and efficiency of the company is also
provided along with the processes to improve their financial performance.
SECTION 1
Financial management and their importance
Financial management is basically related with the crucial practices of a company that are
associated with the effective handling of the monetary funds and financial resources of a firm in
way that allows it to become most successful and also complement its control and regulation
level. Further, the concept of the financial management is defined as a way and process of
dealing and effectively analyzing the monetary and its investment for a business that supports
and helps in taking effective business decisions for having improved efficiency and success
level(Huang, 2021).
Importance of Financial management
Financial management provides an effective pathway for a firm for better attainment of
the goals and objective through leading proper allocation, acquisition and management of funds.
The other main importance and significance of financial management are evaluated as below:
• Proper use of funds- financial management allows effective and proper usage of funds
through supporting improved efficiency level and better distribution of cash and more
effective investment.
• Effective financial decisions- financial management also supports and lads to better
information about the whole commercial activity of firm along with emphasizing in

the actual cash outflow and inflow from investment that supports more effective
decision making by the company(Ritter and Pedersen, 2020).
• Improve profitability- financial management supports the improved efficiency and
better usage of the money that aid and leads to more powerful control over the
financial aspects and budgeting process which supports improved profitability for a
firm.
SECTION2
Financial statement and use of ratio
Financial statement basically comprises of the formal document of a form that examines
and evaluate the actual financial data and position of a company. Thus, financial statement plays
a vital role in providing the detail and compressive understanding about the main financial
characteristics of the firm. The financial report basically comprises of the list of the main
financial data of a company in a structured and systematic manner for effective reporting the
crucial requirements. The main financial statement that are prepared and used by a company to
support effective financial management and control are discussed as below:
Income statement- it is also known as the P&L statement that displays and show case the
main operating and financial condition of a form for a certain period of time. The income
statement is designed with the purpose of assessing the overall maximum productivity of firm
through review of overall sales earning along with analysis of the extra costs to achieve the set
level of income. Further, the income statement has been used with the main aim of determining
about the gross as well as the net income and profit of a firm(Du and et.al, 2020).
Balance Sheet- this financial report basically aims at determining about the overall
profitability level of a firm and provides the summary about the assets, liability and the capital
employed within a firm during a section period of time. Further, the balance sheet also provides
the systematic presentation of the amount that is being contributed by the shareholders along
with the comprehensive value of the net income and assets. Thus, balance sheet supports the
effective assessing of the company core cash situation and also supports the operations need
through leading effective analysts and aiding better review of core financial aspects.
Cash Flow statement- it is also a vital financial report that emphasis and present the
actual inflow and outflow of cash during a specified period of time. The cash flow statement

solely focuses on the ability of a form to meet and address the cash obligation and liability
during a shorter period of time. Further, the cash flow statement provides a summary of the
operations, investing and the financing decisions through effective reconciling of these aspects in
a systematic manner (NGUYEN, 2020).
Use of Ratio in financial management
It has been analyzed that the financial ratio is effectively used with the financial
management as it supports better calculation of organizational value. Financial ratio is basically
assessed and calculated based on some market benchmark and reflects financial position of firm
in comparison with identical growth and assessments of similar company. Use of financial ratio
is vital and significant in financial management because of the below stated reasons:
 Financial ratio is effective in pointing out the potential advances for a firm through
analyzing the deficiency and excess resources to effectively devise its growth plans.
Supports effective planning for a firm based on financial calculation and comparison with
set benchmarks (NGO, TRAM and VU, 2020).
SECTION 3
Business review:
The Net Profit for the year 2016, is £43057 (2015: £18,987,000).
The Company’s key financial and other performance indicators during the year were as follows:

Turnover from continuing operations increased by 5.6% during the year, primarily due to the
acquisition of the Extinguishers business on 1 May 2015, which made a full year’s contribution
in 2016.
Gross Profit =£81125
Net Profit = £43057
Net Profit increased in 2016 by 27.3 %during the year.
Shareholders’ equity increased by 32.9% by £20758.
The company’s “quick ratio” (Current Assets (excluding stock) divided by Current Liabilities) is
1.47
The company’s “current ratio” (Current Assets divided by Current Liabilities) is2.22
Income statement: From the above income statement it is analyzed that gross profit of business
48.2% and the net profit 22.7%. For the calculation require to add the incomes and less
expenditure that helps to know actual gross profit in effective manner. It is understanding that
gross profit of the company present good profitability position that helps to take right decision in
effective manner.
Balance sheet:

Calculating ratios and explaining the interpretation

As per the above ratio it is defined that profitability ratio present the actual financial
performance that helps to decide the future decisions. Profitability ratios are a collection of
statistics that show a firm's potential profit in relation to its capabilities. The primary purpose of
profitability measures is to determine how effectively a business is at maximizing the value of
the investment. Gross profit ratio of the company was 42.76% that presents good profitability
and the sales of the company was 189711. On the other side, net profit of the company was
22.70% which is lower and requires increasing.
As per the above table it understands that Liquid Ratios are used to evaluate a company's
able to meet its current obligations in a timely manner. Current ratio of the business 2.22 which
is more than ideal ratio. It is not good for the business because greater liquidity impact on the
business in adverse manner. At the other extreme, quick ratio 1.47 that is greater than to ideal
ratio. It is not indicating liquidity position of the company so require taking appropriate action.

From the above table it is determining that a business's efficiency ratio gauges how it
maintains and uses its resources within. The effectiveness of a company can be measured by
looking at the circulation of accounts payable, collections, capital, borrowing, and equipment.
Inventory turnover of a business 3.80 times and fixed assets turnover of company 0.62 which is
lower and require to improve.
SECTION 4
Discuss the process which business use for improve its financial performance:
One of the most crucial duties profitable business entrepreneurs conduct is reviewing their
monetary progress regularly. An executive who understands where the company is known in
terms of reliability and where it is headed has a great benefit over all those who don't. Many
businesses have made wise choices based on their gut reactions. This is a really dangerous
approach to manage a company.
The statement of income shows that the organization is experiencing a portion of the cost
in addition to maximizing shareholder value. In order to be competitive, enterprises must
emphasize on cutting charges and avoiding areas where they fall short. In achieving the
organizational goals, the enterprise must think about cutting workforce and overhead fees by
employing way to differentiate. This can contribute to increased gross margins and adequately

looking towards the future. It will help the firm although it will be time to lower time by
reducing sophisticated systems and spending so much on goal achievement, along with other
issues. The company must concentrate on enhancing the profitability in order to boost revenue.
The corporation has to reduce its direct expenses in order to grow income. The business and
future expenditures can be reduced by removing superfluous expenditures. Expenses can also be
cut by bargaining product prices and providing incentives. The business should also keep track
of its overhead expenses by comparing and analyzing its activities to those of other businesses.
It has been analyzed and seen that there are number of the measures and ways that can be
adopted by a firm to have improvement in its productivity level and generate higher profits
which comprises of reduction of the cost components along with supporting and leading out
management of unnecessary capacities (Ritter and Pedersen, 2020). Along with this, it has been
also seen that the getting of advice from the professional and recovering and analyzing the
outstanding debt together with supporting the reduction and rearrange the expenses are also the
effective processes that the business might use to improve their financial performance. Further, it
has been also seen that the considering the improved form of investment along with revising the
offers and pricing and upgrading the record keeping are effective ways and processes to improve
the financial performance of the business. Focusing and emphasizing on the employee
productivity through reward system along with the use of the performance tuning review are also
the effective process to improve financial performance through improved control and check on
the efficiency level along with setting better control on flow of cash and funds to support
improved financial performance (Du and et.al, 2020).
CONCLUSION
As per the above report it is concluded that financial management important aspect of any
business that helps to manage all the finance activities in proper manner. In this assignment
mention the use of ratios in proper manner in financial management and understand the concept
of financial management. Present time every business want to success and want to generate
profitability so for this require applying effective method. There are calculations various ratios
that help to analysis the actual financial performance of business.

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