Importance of Financial Management and Use of Ratios in Improving Financial Performance

This report focuses on the importance of financial management and the use of ratios in improving financial performance. It covers financial statements, calculations, and ways to improve financial performance. The subject is Financial Management, and the course code is BMP3005.

bmp3005

TABLE OF CONTENTS:
INTRODUCTION...........................................................................................................................2
Section 1...........................................................................................................................................2
Importance of financial management...........................................................................................2
Section 2...........................................................................................................................................3
Main financial statement and use of ratios:.................................................................................3
Section 3 ..........................................................................................................................................6
Calculations..................................................................................................................................6
Section 4.........................................................................................................................................11
Improvement of financial performance.....................................................................................11
Conclusion ....................................................................................................................................12
References......................................................................................................................................13

INTRODUCTION
The following report focuses on providing in depth information about the importance of
financial management (Lucianelli and et.al 2021). Financial management refers to the planning,
organizing and controlling of all the financial activities and also utilize the funds of the company.
This report also states about importance of financial management. It also provides information
about use of ratios in financial management and how it is beneficial for investors and company
has been mentioned in this report. This report also provides calculation of ratios, income
statement and balance sheet.
Section 1
Importance of financial management.
Financial management is one of the vital activity in any organization. It refers to the
process of making plans, organize them, control and monitor them. So that organization can
attain their goals and objectives. Financial management is useful for the organization because it
ensures efficient functioning of the company. If the finance of the company is not m properly
managed then organization may face barriers and it will affect them growth and overall
development of the company.
Financial management is important in providing a way to attain all the pre determined
goals and objectives of the company. But it is necessary for the organization that they must get
proper knowledge of allocation, management and acquisition of new fund. It also provides
proper guidance in making future plans for the company. It also assists the management of the
company to acquire new funds and also utilize the way of funds so that company can raise it in
the future. It also helps the company to invest appropriate amount of funds so that they may go
for further expansion. It also increases the overall efficiency of organization. It also assists the
production department to make delay in production.
Another importance of financial management is that it cut down the unnecessary cost of
the company (Cathala, 2021) It also makes sure that they properly use the available fund. It also
helps the business to make appropriate financial decisions. Financial management is also useful
for the perspective of shareholders, as they want to get good return and also want to increase
their wealth. Next importance of financial management is decision-making and it helps the
leaders of the company to achieve all the short term and long term goals of the company. Proper
financial planning is ensured the overall economic growth of the company.

Apart from this, another importance of financial planning is to know the valuation of the
company. It can be related with the increased production as well. Most of the organization
follows different financial strategies which will help the company to improve valuation in the
market. It is also useful for tax planning. It is also very important for the organization to know
the taxation of current fiscal year. So that company can earn good profitability and growth.
Section 2
Main financial statement and use of ratios:
Financial statement refers to the collection of all the finance of business and it represents
the overall financial health of the company. Mainly there are three major financial statement
used by every company which describes all the necessary financial details of the company to
management and investors as well. These are balance sheet, income statement and cash flows
which represent the actual position of the company in terms of finance.
Income statement
Income statement represents the overall revenue, profit/ loss and all the expenses of the
company for a specific period. Income statement is one of the important statement which is used
by company (Wallensteen, 2021 ). An income statement of the company shows all the details
such as revenue which has been generated by company for a fiscal year and all other expenses
which has been occurred to company by operating activities. It is used to represent all the
historical activities of the company. So the income statement represents all holistic operating
activities. Hence, the below income statement of the company turnover, gross profit and net
profit of the company.
Balance sheet
It is also known as the statement of financial position of the company. Balance sheets of
the company provides detail information of what the company is worth for and how many assets
and liabilities have been held by the company. Majorly balance sheet focuses on 3 things such as
assets, liabilities and shareholders equity.
Assets
These are the resources which is being owned by the company (Geeta and et.al 2021).
This is very important for the perspective of investors and company as well, because investor
always wanted to know the resources owned by the company so that in future if the company
wind up its business then they can recover the invested money through assets of the company.

Balance sheet also shows that how these assets of the company get financed through debts and
other borrowings of the company. Assets are also divided into two categories such as Current
assets and fixed assets.
Current assets
Current assets are those assets which get converted into cash within 1 year. Current assets of the
company is — cash and its equivalents, account receivables and inventories.
Fixed assets
Fixed assets are those which remains fixed throughout their life. It includes plant,
property such as – Land, Machinery, building etc.
Liabilities
Liabilities of the company represents all the borrowings and loans which has been taken
by the company to maintain their day to day expenses (Asriyan, 2021). Liabilities also further
divided into two categories such as — Current and non — current.
Current liabilities:
Current liabilities of the company show how much loan has been taken by the company
so that it can manage their working capital. Current liabilities are — Accounts payable, short
term loan etc.
Non- current liabilities
Long term liabilities defines all the debts, loan and other obligations of the company.
These are the major financial obligation of the company which remains due for more than 1 year.
So as per the case study the fixed assets of the company were intangible assets, Tangible assets
and investments. On the other hand current assets are stocks, debtors, and cash at bank.
Besides these current liabilities of the company bank loan, trade creditors, and income tax
payable.
Use of ratios
Ratios are being used by the company to know the relationship between two and more
variants and components of the company (Habiba and et.al 2021). Ratios are being used by
company to compare the results of several years. It is also helpful for the management of the
company to know the overall performance of company for different time duration. Ratios are
useful tool for the company which allow them to make comparison with the similar industry.
There are some popular ratios available which is used by every company to know their financial

strength of the company. For instance - Current ratio and quick ratio represent that how much
investment have been done by the company and how strong their asset is.
Current ratio
Current ratio of the company is also known as the liquidity ratio which used to measure
the effectiveness of the company. It states that how company is using their current assets to repay
their short term debts and liabilities. In short current ratio is being used by the company to the
ability of the company to repay all the short term obligation so that company can attract new
investors towards them. As it is one of the important ratio for the perspective of investors as
well.
As per the case study the current ratio of this company is 1.46 which states that company
is in good situation and it can easily repay their liabilities with the help of current assets. It
means company has more assets as compared to their liabilities (Di Casola, 2021). This ratio is
also helpful for the investors because it assists them to understand the capacity and potential of
the company, and they can easily compare it with the competitors and other peers.
Quick ratio
This ratio is known as the Acid test ratio of the company which also represents the ability
of the entire business to repay all the debts and obligation by using those assets which can easily
get converted into cash. Quick ratio do not include inventories as it becomes difficult for the
company to convert their stocks into finished goods at the earliest and it becomes difficult for the
company to convert the goods into finished goods within a year. According to the given case
study the quick ratio is 1.2 which states that company is in good situation.

Section 3
Calculations

Business review Template
The Net Profit for the year 2016 , is £? (2015: £18,987,000).
The Company’s key financial and other performance indicators during the year were as follows:
2016
£’000
2015
£’000
Change
%
Profit for the financial year ? 18,987 + ? %
Shareholder’s equity 83802.7 63,057 +32.9%
Customer satisfaction 4.5 4.1 +10%
Average number of employees 649 618 +5%
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 years
contribution in 2016.
Gross Profit = 0.6
Net Profit = 0.4
Net Profit increased in 2016 by 2.3% during the year.
Shareholders’ equity increased by 32.9% by £?.
The company’s “quick ratio” (Current Assets (excluding stock) divided by Current
Liabilities) is 61000/59800 = 1.02

The company’s “current ratio” (Current Assets divided by Current Liabilities. ) is =
87400/59800=1.46
Notes to the financial statements
at 31 December 2016
3. Turnover
Turnover recognised in the income statement is analysed as
2016 2015
£000 £000
Turnover from continuing operations 189,711 179,587
4. Cost of Sales
2016 2015
£000 £000
Cost of Sales 108,586 98,975
5. Overheads
2016 2015
£000 £000

Total Overheads 38,068 61,625
Section 4
Improvement of financial performance
After analysing the entire case study it can be stated that this company can improve their
financial performance (Manikas and et.al 2021). Although this company has good financial
performance, it is able to generate return by using their assets and other resources. But there are
different ways through which this company can improve their overall performance of the
company. By cutting down their expenses, this company can improve their financial situation
and generate more return for the investors and help the management to increase their
competitive edge in the market.
Another way to improvise their financial performance is that they can recover all the
outstanding payments, if the company is able to generate cash and income from their unpaid
invoices then company may use this money for their further investment. Besides this, company
may sell their all those assets which are not come in use, and they are no longer useful for the
company. Company can do it by online auction so that they may get good return of their unused
assets.
Apart from this, company can focus on repaying their debts, it will also help the company
to enhance their financial performance. When company will become fully debt free then it can
provide more dividend to the shareholders. Besides this, it can make certain changes in the prices
of their products so their sales can rise in the market and company will be able to generate more
revenue and income as compared to their expenses. Along with this, company can go for crowd
funding as well so that they do not have to run short of money.
Conclusion
The above report demonstrated about the financial performance of the company. This
report defines importance of financial management for the company and how it is useful for
every company. Besides this, main financial statements such as balance sheet, income statement

has been described in this report, along with this calculation of income statement and balance
sheet has been shown in the report. Apart from this, there are different ways have been
mentioned in the report though which company can improve the financial performance.

References
Books and Journal:
Asriyan, V., 2021. Balance Sheet Channel with Information-Trading Frictions in Secondary
Markets. The Review of Economic Studies. 88(1). pp.44-90.
Cathala, C., 2021. INTEGRATING THE COST OF THE CARBON FOOTPRINT WITHIN
THE INCOME STATEMENT-TESTS ON SEVEN POLISH FIRMS. Financial
Internet Quarterly'e-Finanse', 17(2).
Di Casola, P., 2021. What does research say about the effects of central bank balance sheet
policies?. Economic Commentaries, (2).
Geeta, M. and Nagasivanand, C., 2021. Financial Planning through the Liquidity Ratios for
HDFC and SBI Banks. REVISTA GEINTEC-GESTAO INOVACAO E
TECNOLOGIAS, 11(4), pp.2616-2628.
Habiba, U., Xinbang, C. and Ahmad, R.I., 2021. The influence of stock market and financial
institution development on carbon emissions with the importance of renewable energy
consumption and foreign direct investment in G20 countries. Environmental Science
and Pollution Research, pp.1-12.
Lucianelli, G., Fazzari, A.L. and Cavalieri, M., 2021. The Analysis of Income Statement and
Final Balance Sheet in Local Governments: A Case Study for Financial
Sustainability. International Journal of Business and Management.15(3).pp.1-80.
Manikas, A.S., Kroes, J.R. and Foster, B.P., 2021. Does the importance of environmental issues
within an industry affect the relationship between lean operations and corporate
financial performance?. Sustainable Production and Consumption.27. pp.2112-2120.
Wallensteen, P., 2021. International Conflict Resolution, UN and Regional Organizations. The
Balance Sheet. In Peter Wallensteen: A Pioneer in Making Peace Researchable (pp.
253-268). Springer, Cham.