Concept and Importance of Financial Management: Financial Statements and Ratios

BUSINESS

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
Discussing the concept and importance of the financial management........................................1
Elaborating main financial statements and use of ratios in financial management. ..................2
Calculation of Profitability ratio, efficiency ratio and liquidity ratio:.............................................4
Profitability Ratio: ......................................................................................................................4
Efficiency Ratio:.........................................................................................................................6
Liquidity ratios: ..........................................................................................................................7
Section 4...........................................................................................................................................7
Recommendation.........................................................................................................................7
CONCLUSION................................................................................................................................9
REFERENCES .............................................................................................................................10

INTRODUCTION
Financial management is the process of acquisition and utilisation of funds in such a
manner which results in the increased profitability of the business. The functions of management
such as planning, organising, directing and controlling are integrating with the finance of the
enterprise (Al-ali, 2021). In other words, it can be stated that financial management helps in
achieving the organisational goals of the business by utilising the financial resources in effective
manner. This report contains the concept and importance of financial management. It also
includes various financial statements and use of financial ratios in management. This report
encompasses preparation of income statement, statement of financial position and ratio analysis.
It helps to know the profitability, liquidity and efficiency of the organisation.
MAIN BODY
SECTION 1
Discussing the concept and importance of the financial management.
Financial management is the combination of two words, which is financial and
management. In every organisation, it is important to raise capital for conducting the operations
of the business (Castells and Sole-Vilanova, 2022). There is a systematic procedure to manage
the finance of the company. It includes planning, organising, directing and controlling the
finance of the company. The financial manager who heads the department of finance performs
the following functions which can be defined as given below:
 determining the proportion of debt and equity in the business.
 Investing funds in the safe and profitable projects.
 Allocating profits in business effectively.
 Computing the amount of capital required in the organisation.
There is a significance of financial management which can be described as given below:
 Financial planning – In order to conduct any task of the business, it is mandatory to
plan the activities in advance for smooth functioning of the enterprise (DeWitt and Koh,
2020). It includes estimating the requirements of capital and determining the
competition. There are various decisions of the business such as financing decision,
investing decision and dividend decisions. These decisions are somewhat interrelated
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and impacts each other. Financial planning helps in maintaining balance between the
outflow and inflow of funds so that stability can be gained.
 Safeguarding and protection of business funds – It helps in effective allocation of
funds. If resources are utilised effectively then the output of the firm can be increased. It
is the responsibility of finance manager to invest the funds in those projects which gives
high returns to the organisation. The manager must ensure that business expenses of the
firm should not exceed its income. The reduced expenses of the firm helps to improve
the funds in the business (Garg and Kashav, 2021).
 Create investment opportunity for entity – When the organisation is able to manage
its finance in effective manner, it provides a scope for the organisation to invest in
multiple sources for raising the profits and market share of the enterprise. There are
several investment opportunities such as mutual funds, stocks, commercial property and
gold etc. It multiplies the earnings and helps in expanding the activities of the business.
 Tax planning and management – The management of finance also includes the
planning of tax. Government of every country require funds to run the economy and
these funds are arranged by the source of tax. The organisation must plan its liabilities of
tax in such a way that it reduces the overall burden of the enterprise.
SECTION 2
Elaborating main financial statements and use of ratios in financial management.
Financial statement are the records of the business which reflect the financial position of
the enterprise. There are mainly three types of financial statements: income statement, cash flow
statement and balance sheet. There is a detailed explanation of the financial statement :
1. Cash flow statements – It shows the flow of cash of the organisation. The activities are divide
into three categories: Cash flow from operating activities include the day to day operations of
the business. It also includes the adjustment of working capital of the organisation. The cash
flow from investing activity includes the sale and purchase of fixed assets of the organisation.
The purchase of non current assets is an outflow of the cash whereas sale of fixed assets is an
inflow for the organisation. The cash flow from financing activities includes the issue and
redemption of shares and debentures (Hossain, Ibrahim and Uddin, 2020).
2. Balance sheet - It shows company's assets, liabilities and shareholder equity. The
balance sheet is used to assess the position of the business. It follows the equation of sum
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