Importance of Financial Management and Use of Financial Reports in Business

This report discusses the importance of financial management in business, including planning, organizing, directing, and monitoring financial functions. It covers financial statements, such as cash flow statements, income statements, and balance sheets, and the use of ratios in financial management. The report also provides examples of how businesses can improve their financial performance. Course code: BMP3005

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
Submitted by:
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Contents
Table of Contents
Introduction...................................................................................................................3
Section 1: Definition and discussion of the concept and importance of financial
management ............................................................................................................3
Section 2: Description and discussion of the main financial statements and
explain the use of ratios in financial management ..................................................4
Section 3.......................................................................................................................5
Completing the Information on the ‘Business Review Template ............................5
Using Excel producing an Income Statement for the Sample Organisation ...........6
Using the Case study information describing the profitability, liquidity and
efficiency of the company based on the results of ratio analysis.............................7
Section 4: Using examples from the case study describing and discussing the
processes this business might use to improve their financial performance. 9
Conclusion..................................................................................................................10
References ........................................................................................................11
Appendix:....................................................................................................................11
Income Statement..................................................................................................11
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Introduction
Financial Management is very crucial for every business organization as it
assists in managing the financial operations of the business in an efficient manner.
Management of finance is required in existing companies as well as in newly formed
businesses. It performs a key role in managing the operations of the business.
Financial management refers to the process of planning , organising, directing and
monitoring the financial functions of the business. It provides pillars for strategy
implementation , decision making and for controlling the financial activities of the
business (Sconti, 2022). The following report will cover the importance of financial
management in business and use of financial reports in an organization. It will also
cover the measurement and calculation of ratios for determining the operational and
financial performance of business. Further, the report will also deal about the
evaluation and comparison of financial performance and financial reports of past
years with current year.
Section 1: Definition and discussion of the concept and importance of
financial management
Financial management is a process of planning , organising and measuring
the financial activities of the business. It helps in implementation of the plans of
management and performs a key role in estimating the long term profitability for the
financial projects of business. It focuses on different areas of businesses such as on
earning profits, decreasing expenses and losses , increasing the cash flow level for
the business organization. It provides the goal oriented path to achieve financial
objectives and thereby assists in adding value to the business. It facilitates business
expansion by making it strong in terms of financial aspects. The importance of
financial management is explained below:
 Ensures profitability : Financial management provides alternative options
and choosing the best available options for investing and financing activities.
It thus helps in managing the funds of businesses to ensure long term
profitability that facilitates promotion in growth and increased scale of
business.
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 Provides value to the businesses : Financial planning involves estimation of
finance requirements according to the projects undertaken. It involves the
consideration by the management to analyse the accurate budget
requirement for the project that provides financial benefit to estimate the
requirements of the future and thus it adds value to the business of the firm
(Mo, 2022).
 Improves employees' performance : Financial Management develops
understanding of the employees regarding saving of finance and its
appropriate utilisation. It improves the performance of employees regarding
money management that contributes to the improved performance of
organization as well.
 Ensures optimum utilisation of resources : It ensures effective utilisation of
financial as well as operational resources by allocating them in an efficient
and pre planned manner. It helps them in allocating the limited resources and
optimum utilisation of those resources that contributes to the overall
profitability of the organization (Abu Wadi and et. al., 2022).
 Helps in maintaining costs : It facilitates evaluation of the cost related
aspects of the organization that helps in maintaining the costs and reducing it
for effective performance of the business and its stability in the market.
Section 2: Description and discussion of the main financial statements and
explain the use of ratios in financial management
Financial Statements are the records that depict the financial position of
company and explain its financial structure. The financial reports must show the true
and fair view of the accounting information of company as they are audited by the
chartered accountants and government authorities for checking the investing
activities and tax related aspects of the company. Broadly, there are three types of
financial statements that are explained below :
 Cash flow Statements : It is a statement that provides the information
regarding cash flow of the company. It determines the net cash flow of the
enterprise by calculating the cash inflows and outflows. It mainly covers three
activities of cash flows i.e. operating activities, investing activities and
financing activities (Yu, Jiao and Sampat, 2022). The cash flows from
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operations and before and after changes in working capital falls under cash
flow from operating activities. Cash flow from purchasing and selling of fixed
or non current business assets is included in investing activities. The net flow
of cash from financing activities include issue and redemption of shares or
debentures.
 Income Statements : It is prepared to calculate the profits of the organization
by considering its earnings and expenses. It includes sales, cost of goods
sold and other expenses form business operations to determine the net profit
or net loss of the company.
 Balance Sheet : It shows the position of assets and liabilities of the business
as on a particular date. The assets of the company consists of current (such
as cash, debtors, short term securities etc. ) as well as non current assets
(such as machinery, furniture etc.) The liabilities are also categorised as
current (i.e. trade payables, bank overdraft etc.)and long term liabilities (i.e.
long term loans , debentures etc.)
Importance and Uses of Financial ratios :
Financial or accounting ratios are used to evaluate the profitability of the
organization on the basis of financial statements. They express the relationships
between two financial variables of accounting through ratio analysis (Fikri and et. al.,
2022). The importance or uses of financial ratios are provided hereunder :
 For determining profitability : The calculation of ratios like return on equity
and return on assets provides support in determining the profitability of
business. Also, the calculation of gross and net profit ratios depicts the profit
as percentage of sales.
 For estimating the financial risks : The interest coverage ratios and
leverage ratios help in determining the risks of associated debts of the
organization. Leverage ratios also determine the level of risk of external funds
procured by the company.
 Forecasting : By the preparation of all financial statements and calculating all
profit or leverage ratios, organizations are able to analyse their current
performance by which they can compare their present performance and
results with that of past profits and can identify the deviations to improve the
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future performance of the business by having an analysis of trends through
comparison of financial reports.
Section 3
Completing the Information on the ‘Business Review Template
Using Excel producing an Income Statement for the Sample
Organisation
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Using the Case study information describing the profitability,
liquidity and efficiency of the company based on the results of
ratio analysis
 Profitability Ratio : It is used to measure the ability of company to earn the
profits considering the level of its expenditure. It depicts the financial position
of the business. It includes the financial ratios like gross profit ratio, net profit
ratio, return on equity and return on assets etc. (Brauner, 2022). It help in
comparing the results of company with that of its competitors.
Interpretation : The profit ratios are calculated by taking into account cost of sales
and revenues after considering the deduction of operating and non operating
expenses. Gross profit is arrived as percentage after deducting cost of sales from
gross revenues. The net profit margin is arrived after deduction of overheads. The
gross and net profit respectively are 42.76% and 22.70% that indicates a reduction
of about 20 %. So, the company is required to maintain the costs of overheads that
is reducing the net profits for the company. It is imperative to compare the
profitability with that of the competitive and similar companies to know their position
in the market.
 Efficiency ratio : These ratios are used to measure the ability of company for
generating revenues by the optimum use of assets. It evaluates the time
taken by company in collecting cash from customers , in converting the stock
into cash and in the payment of loans (Bobzin and et. al., 2022). These ratios
include calculation of Assets turnover ratio, Debtors turnover ratio, Stock
turnover ratio and account receivables and payables.
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Interpretation : From the above calculation , it has been interpreted that
Debtors take about 51 days to make payments to the company. On the other hand,
company takes around 52 days to make payments to the creditors. So, the creditors
and debtors take almost same time to take and make the payments respectively that
ensures availability of funds for working capital to the company. The 3.8 inventory
turnover ratio tells that the investment in stock is required 4 times after every 3
months i.e. quarterly. The assets turnover ratio is 1.23 that ensures that the
contribution of assets is optimum for the generation of funds that facilitates the
stability of company in the market.
 Liquidity Ratio : These ratios evaluate the ability of the business to pay its
debts. It assists in evaluating the solvency of business and in determining the
cash availability for understanding the short term financial position of the
business (Chaffai, 2022). The Current ratio, Quick ratio and operating cash
flow ratio falls under the category of liquidity ratios.
Interpretation : This calculation shows the liquidity position of the company.
The ideal current ratio is 2:1 and ideal liquid ratio is 1:1. current ratio of 2.22:1 shows
that the company is solvent as these are 2.22 times of current liabilities. The quick
ratio of 1.47:1 shows that the company is solvent and liquid enough to make
payments of its loans and other liabilities.
Section 4: Using examples from the case study describing
and discussing the processes this business might use
to improve their financial performance.
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Financial Performance : It is a way of evaluation that how much the company is
generating revenues by the optimum use of its available assets. Financial performance
depicts the health of the organization in terms of its solvency and liquidity position. The
measures of financial performance include working capital, cash flows, gross profit ratio,
net profit ratio, assets turnover ratio that are calculated to measure the financial
performance of the company (Samitas and et. al., 2022). The good financial performance
indicates that the company has much revenues required debts with the ability to pay ,
and adequate cash flow. The preparation of financial statements and calculation of
financial ratios help the business to take corrective actions regarding its financial
performance as under :
 The Increment in net profit is 126.77% due to the reduction in non operating
costs i.e. interest expenses and administrative expenses .
 The customer satisfaction is increased because of the increased investment
and the growth of the firm is also getting support. It has resulted in stability of
employees in the organization.
 There is a decline in the liquidity position of the company because of more
cash outflows. This is due to reduction in the current assets to current
liabilities i.e. 82 % as compared to the previous year.
 There is an increment in shareholder's equity and revenues and sale of
shares, reduction in operating expenses.
Improvements to be taken are listed below :
 Implementing Marketing Strategies : The various strategies of marketing
should be implemented to improve the operational performance by the
optimum utilisation of limited resources . Company should strive to maintain
the costs to generate more profits by increasing the revenues (Farnoush and
et. al., 2022). It should use E-commerce to initiate digital marketing to access
wide range of customers with maintaining low costs.
 Limited resources allocation : The effective allocation of limited resources
i.e. financial as well as operational, ensures better productivity in the
organization that contributes to the improved performance of the organization.
Conclusion
From the above discussion, it has been concluded that financial management
is the most important aspect of business enterprise. It helps the businesses in
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maintaining costs and generating revenues with the optimum utilisation of the
available assets and limited resources. The preparation of financial statements
assists in interpretation of financial performance by various stakeholders and enable
the companies to forecast the future requirements by comparing the current year
financial statements with that of prior periods. The calculation of financial ratios
assists in determining the solvency and liquidity position of the business that helps in
taking corrective measures to improve the financial as well as functional
performance. Companies can implement the marketing strategies to increase he
productivity of business.
References
Abu Wadi, R., and et. al., 2022. Financial sustainability and outreach in microfinance
institutions: evidence from MENA countries. Journal of Sustainable Finance &
Investment, 12(1). pp.238-250.
Bobzin, K., and et. al., 2022. Hybrid reactive sputtering of transition metal aluminum
oxynitrides. Thin Solid Films, 742, p.139028.
Brauner, Y., 2022. Agreement? What Agreement? The 8 October 2021, OECD
Statement in Perspective. Intertax, 50(1).
Chaffai, M.E., 2022. New evidence on Islamic and conventional bank efficiency: A
meta‐regression analysis. Bulletin of Economic Research.
Farnoush, A., and et. al., 2022. Going beyond intent to adopt Blockchain: an
analytics approach to understand board member and financial health
characteristics. Annals of Operations Research, 308(1). pp.93-123.
Fikri, N., and et. al., 2022. WS-PDC: Persistent Distributed Channel-Based Web
Services Applied on IFRS Data Processing and Loading. In Proceedings of Sixth
International Congress on Information and Communication Technology (pp. 847-
855). Springer, Singapore.
Mo, I.G., 2022. Managing institutional complexity in a state-owned enterprise–the
role of explicated values and other management controls. Qualitative Research in
Accounting & Management.
Samitas, A., and et. al., 2022. Are timber and water investments safe-havens? A
volatility spillover approach and portfolio hedging strategies for investors. Finance
Research Letters, p.102657.
Sconti, A., 2022. Digital vs. in-person financial education: What works best for
Generation Z?. Journal of Economic Behavior & Organization, 194, pp.300-318.
Yu, P., Jiao, A. and Sampat, M., 2022. The Effect of Chinese Green Transformation
on Competitiveness and the Environment. In Handbook of Research on Green,
Circular, and Digital Economies as Tools for Recovery and Sustainability (pp. 257-
279). IGI Global.
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Appendix:
Income Statement
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