Importance of Financial Management: Key Financial Statements and Ratios

This report discusses the importance of financial management for effective business operations, covering key financial statements and ratios such as profitability, liquidity, and efficiency ratios. It also provides strategies for improving financial performance.

Importance of
Financial
Management

Table of Contents
INTRODUCTION ..........................................................................................................................3
Section 1...........................................................................................................................................3
Financial Management and its value to an organisation........................................................3
Section 2...........................................................................................................................................4
Key financial statements and use of ratios.............................................................................4
Section 3 ..........................................................................................................................................6
“Business Review Template”.................................................................................................6
Creating an income statement................................................................................................6
Balance Sheet.........................................................................................................................7
Describe several ratios such as profitability, liquidity and efficiency ratios..........................8
Section 4.........................................................................................................................................10
Financial performance..........................................................................................................10
CONCLUSION..............................................................................................................................11
REFERNCES:................................................................................................................................12
Books and Journals:..............................................................................................................12
Appendix........................................................................................................................................13

INTRODUCTION
Managing financial resources is one of the most primary aspects of operating business
organisation smoothly. Financial management plays the role of arranging and allocating funds
within the business (Akgün and Karataş, 2020). This report is based upon the concept and value
of managing finances appropriately. The following report also considers several concepts of
financial statements while discussing the use of ratios in managing finances. With the use of
specific examples, some ratios have been explained in this report such as profitability, efficiency
and liquidity ratios. In the end, strategies and factors are also covered to analyse and improve the
financial performance.
Section 1
Financial Management and its value to an organisation.
Financial management can be understood as a set of activities such as planning,
organising, leading and controlling the financial transactions such as procurement and
exploitation of funds of an organisation. This comprehends that applying right principles of
general management to financial resources of an organisation.
 Maintaining the sufficient amount of business assets.
 Safeguarding investors to receive bigger amount of profits from the revenue.
 Ideal and right exploitation of business assets. Producing safe and veritable venture freedoms to place resources into.
Importance of financial management:
 Safeguarding and protecting funds: The value of financial management cover
safeguarding finance towards attaining the organisational goals. Financial manager has to
evaluate the areas where the funds are necessitate and allocate suitably in all the areas for
better and smooth running of the enterprise (Brigham and Daves, 2021). Overspending
the resources on one single project can affect other operations as they may limit with
funds in several cases.
 Investment opportunities: As a person, it is essential to manage and save funds in order
to create investment opportunities. These kind of opportunities will help an individual in
producing wealth so that one van enjoy in their retirement period. These investment

opportunities may cover investing in stocks, mutual funds, lands, properties, gold and
many more. Depending on the risk abilities one can select the right way of option.
 Financial decision: Financial decisions might affect the entire operations of business.
Since, it has an exigent relationships with all the departments of business. Therefore, it is
valuable to take right decisions about funds allocation as any wrong actions can be
affected badly to the business.
Section 2
Key financial statements and use of ratios.
Financial statements can be represented as a collection of summary-level reports about
the financial results, cash flows and financial position of the business. These encompasses
income statements, statements of cash flows and balance sheets (Brydges and et.al., 2019). These
statements are often audited by accountants, government agencies, organisations and many more,
to make sure accuracy and for investing, tax and investing purposes. The discussion on several
statements are as follows:
 Profit and loss account: This statement encompasses the information about income,
expenses, revenue generated, outstanding and accrued income and expenses which have
been fall out in an accounting period. It showcases the deals that have been completed in
the time period and relatable costs that have been faced by the business to issue and
generate the sales. By limiting the pay-offs and costs of the enterprise represents its
annual worth for the accounting period.
 Statement of financial performance: This statement act as a most fundamental
statement as it offers a deep acknowledgement to the clients of financial information
about the business entity. This statement showcases the entire understanding of the assets
and liabilities which the enterprise is ready to give in the upcoming time. It is additionally
noticed as pecuniary records which is the chief business concern (Chen, Lee, and Liu,
2020). Commonly, this statement represents where the business organisation stands
monetarily at a certain mark of the time. Cash flow statement: This statement of cash flow showcases the net value of inflow and
outflow of cash from the corporate over a definite time frame. It represents the cash
alterations from the spending, operating and financial actions during a period of time.

Operational activities demonstrates the pervert created in the existing resources and and
existing liabilities, duty expenses and interests. Financial activities demonstrates the
inflows and outflows of cash from the issue of shareholder's debentures, capital, advances
as well as payment of dividend.
Use of ratios in financial management:
Financial ratios are made with the utilization of quantitative values taken from the
accounting records to receive important content about an organisation. The values seen on a
accounting records of a business- income statement, balance sheet, cash flow- are utilised to do
quantitative reasoning and evaluate a business's position, liquidity, profitability, margins,
valuation, rates of return and many more (Cohen and Malkogianni, 2021).
 Make comparative judgements regarding business performance: Distinguishing
financial ratios with that of key players is done to see whether an organisation is acting
healthier or worsened than the average of industry.
 Financial ratios aids the important supervisors in decision-making: The pecuniary
reports, remuneration of the business, capacity of acquisition, benefits, patterns of returns
are employed in reckoning of extents and after definite picks of such proportions. The
decision-makers receive a short statement about what is to be finished in the future to
attain benefits.
 Operational efficiency: The ratios also assists in choosing the solvency, liquidity and
fecundity of the organisation. It supports the management with keeping low outgo at high
skill to fit with the set goals of business.

Section 3
“Business Review Template”.
Creating an income statement
This is covered in appendix.

Balance Sheet

Describe several ratios such as profitability, liquidity and efficiency ratios.
 Profitability ratio: These ratios comes under the category of financial parameters that
are generally exploited to know the abilities of an organisation to generate earnings
during a period of time in relations to various components of income statements and
balance sheet of an accounting year (Gabbi and Levich, 2019). These include some key
profitability ratios such as gross profit margin, return on assets, net profit margins and
return on equity.
Interpretation: From the above ratios, it is interpreted that it shows the profit percentage
in regards with generated profit consider ing operating and non-operating expenses. Gross profit
margin is the symmetry of funds left-handed from the net profit and revenue margins means the
income percentage preserved after cost from the revenue. 42.76% is the gross profit and 22.7% is
the net gain, which showcases that the profit is limiting by approx. 20%. Hence, the organisation
requires to leave the overhead costs which is disturbing in generating more net worth. For the

investors, it is quite vital to compare the profits with other key players of the similar industry to
analyse the business position in the sector (Jain, McInish and Miller, 2019).
 Efficiency ratio: This type of ratios showcases the abilities of business to use its assets
and liabilities over a particular time frame. It shows how fast the business manages to
owe its payment from the clients and how far it takes time to finish the debt payment
while evaluating the turnovers of equity and assets. The key ratios that it covers are stock
turnover, accounts payable turnover ratio, asset turnover as well as receivable turnover
ratio.
Interpretation: It is seen that average customer takes approx. 51 days to fulfil their debt
amount while creditors take 52 days to gain their payments. Thus, the business corporation gets
and pays their payments and debt amount almost in the similar time frame. This can be a
drawback too as if there is a decrease in the receivable day then it may create an issue for the
business and there is very tiny variation in the days. The ratio of inventory is 3.8 which showcase
that the accomplished investment of stock flows approx. four times in 12 months that is 3 months
in 12 months (Martin, Keown and Titman, 2020). The entire assets turnover ratio is 1.23 which
showcase that the organisation is acting healthy and making adequate sum of revenue at the end
of accounting period for making a sustainable position in the industry.
 Liquidity ratio: It assures the abilities of business to clear its debt obligation and also
showcase the solvency of the business. These ratios are relies upon present liabilities,
present assets and present stock. The prime ratios include quick ratio and current ratio.

Interpretation: Liquidating position is determined from the above ratios. 2:1 is an ideal
existing ratio while 1:1 is a quick ratio. It is seen that existing assets to liabilities ratio is 2.22
which delineates the solvency of company. But, after eliminating the stock from the present
assets, still the quick ratio is 1.47 which determines the organisation has ample amount of
monetary value to clear off their debts and liabilities and having it impressively.
Section 4
Financial performance
Financial performance can be denoted as a life-sustaining aspect of the organisation as
looking at corporation carrying into actions, the money investors make choices to spend in the
business. Thus, it is fundamental for the business to make right choices of allocation of funds.
Though, the key concern is wealth maximization in order to survive in the market. For such
reason, the financial ratios supports the manager and business entity to make suitable evaluations
(Tolpegin, 2019). Form the calculations done, it is measured that:
 The current assets to current liabilities is weakened by eighty two percent from the last
year which demonstrates that the cash outflows is more and the business is limiting with
its liquidating position.
 The rise in the net profit by 126.77% due to the non-operating costs such as interests has
been reduced and administrative expenditures is also reduced. Showing that equity of shareholders is rising, increasing of profits, utilising in a rise in
commercing shares and fall in the operating costs.
Enhancement:
 Utilization of resources effectively and efficiently will help in lowering the costs and
rise in price will result in profits leverage. It will also help in boosting the business
efficiencies and productivities.

 By limiting inventory and rising its turnover will demonstrates the leverage in the needs
of working capital (Van Horne, 2020).
 Marketing tactics and plans can be used for the betterment of the business so as it to
lowering the costs and optimizing available resources in making more profits. Promoting
on social media platforms is quite cheaper and effective to reach maximum masses.
CONCLUSION
It is summarised that financial management possesses the important role in effective
operations and functioning of business. It focuses on the funds allocation, demonstrates the
economic stability, profitability and solvency of business while making various important
decisions regarding funds. Financial statements deals with a summary of transactions that a
business done in an accounting period. These are mandatory for every transactions to keep and
get them audited by the right sources whether it is internal and external. Financial ratios supports
in knowing the efficiencies and solvencies of the business. Thus, from the ratios calculated in the
report, it is sensed that the business is generating a good amount of net profit but it can also limit
its inventory costs which will aid in rising the net earning and revenues.

REFERNCES:
Books and Journals:
Akgün, A.I. and Karataş, A.M., 2020. Investigating the relationship between working capital
management and business performance: Evidence from the 2008 financial crisis of EU-
28. International Journal of Managerial Finance.
Brigham, E.F. and Daves, P.R., 2021. Intermediate financial management. Cengage Learning.
Brydges, G. and et.al., 2019. Assessing Executive Nurse Leaders' Financial Literacy Level: A
Mixed-Methods Study. JONA: The Journal of Nursing Administration, 49(12), pp.596-
603.
Chen, I.J., Lee, Y.Y. and Liu, Y.C., 2020. Bank liquidity, macroeconomic risk, and bank risk:
Evidence from the Financial Services Modernization Act. European Financial
Management, 26(1), pp.143-175.
Cohen, S. and Malkogianni, I., 2021. Sustainability measures and earnings management:
evidence from Greek municipalities. Journal of Public Budgeting, Accounting &
Financial Management.
Gabbi, G. and Levich, R., 2019. Controlling risks to ensure financial stability and reducing
volatility. Journal of International Financial Management & Accounting, 30(3), pp.183-
187.
Jain, P.K., McInish, T.H. and Miller, J.L., 2019. Insights from bitcoin trading. Financial
Management, 48(4), pp.1031-1048.
Martin, J.D., Keown, A.J. and Titman, S., 2020. Financial management: principles and
applications. Prentice Hall.
Tolpegin, O.A., 2019. Modern approaches to determining the nature of cash flows and their role
in assessing the financial condition of an organization/Tolpegina OA, Seregina E.
Yu. Financial management, (4), pp.13-27.
Van Horne, J.C., 2020. Fundamentals of financial management.

Appendix
Calculations from the case study:

Income Statement: