Financial Management: Importance, Financial Statements, Ratios, and Case Study Analysis

This report from Desklib covers the concept and importance of financial management, financial statements, ratios, and case study analysis. It includes insights into profitability, liquidity, and efficiency ratios based on a case study analysis. The report also describes ways to improve a company's financial performance.

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Table of Contents
INTRODUCTION ..........................................................................................................................3
SECTION 1......................................................................................................................................3
Determine the concept of Financial Management along with its importance.............................3
SECTION 2......................................................................................................................................4
Describe the main financial statements and the use of ratios in financial management.............4
SECTION 3......................................................................................................................................5
(ii) Income statement using Excel...............................................................................................6
(iii) Completed the Balance sheet using excel............................................................................6
(iv) Determine the Profitability, Liquidity and Efficiency ratio based on company's analysis
results using case study information...........................................................................................7
SECTION 4......................................................................................................................................9
Describe the structure of business which is using for the improvement their financial
performance along with examples from the case study..............................................................9
CONCLUSION :............................................................................................................................10
REFERENCES..............................................................................................................................11
APPENDIX....................................................................................................................................12

INTRODUCTION
Financial conduct is the process of collecting, allocating, managing and controlling all the
procedure of any firm's fundamentals structure to gain maximum earnings allowing lower cost-
volume (Akhtar and Sarmah, 2018). In this report, the consideration of concept, definition and its
importance shows the valuation of the topic. After that, financial statements defines briefly and
concisely with balance sheet, income record, cash-flow analysis and ratios for finding
informative aspects with the calculation of recorded data in case study. At the end, the major
findings is to analyse how to more improvement in company's performance level.
SECTION 1
Determine the concept of Financial Management along with its importance.
Finance is the core of any business. Finance is needed to run the company smoothly and
efficiently. Financial management is that part of the organization which is concerned with the
planning, organizing, directing and controlling of the financial undertakings. It helps in meeting
the needs of shareholder and maximizing the revenues, profit and growth of the company.
Importance of Financial Management:
1. Profitability: It analyses the efficiency and the growth opportunities of the firm which
will further help in the increasing the profitability and provides a sustainable strategy to
the company.
2. Financial Decision: It helps in taking the critical finance-oriented decisions in respective
of the company. A wrong decision can drive down the whole business. It tells us about
the various risks and options and helps in deciding the proportion of the shareholder's
capital and the borrowed funds.
3. Allocation of Funds: The proper distribution of monetary resources and dividends can
be allocated as per the profit. It improves the functional ratio and reduce the cost of
capital and increases the economic value of the firm (Duque-Grisales and Aguilera-
Caracuel, 2021).
4. Formation of capital structure: For the estimation of the capital required, the structure
needs to be formed. Any undertaking depends on the amount of capital a firm has and
how much it needs to be raised from the external sources.

5. Economic Stability: It provides the business a firmness, as it represents the sound
financial system and can prevent from the activities which can be degrading for the
organization and aid in sustaining and earning more profits (Fernandez-Lopez, and et. al.,
2017).
SECTION 2
Describe the main financial statements and the use of ratios in financial management.
Financial Statements are the records which are mandatory for the company to maintain. It
shows the economic activities and position of the business. These are audited internally and
externally by the government officials, accountants and firms to ensure the accuracy of the tax
and for the investment purposes. Some of the main financial statements are:
1. Balance Sheet: It provides an overview of the business's asset, liabilities and the
shareholder's equity of a fiscal year. Both the asset and liability section should be equal,
if it doesn't match then there is some error in recording of the transactions. It also shows
the cash and bank balance of the current fiscal year.
2. Income Statement: It focuses on the revenues and expenses and gives the profit known
as net income of the company. It is maintained to show the profits generated by the
business. It is done by summarizing the revenue and deducting the expenses incurred in
the financial year and gives the net profit/ loss of the fiscal year. It is divided in to two
parts. First, gives the gross profit considering the operating income and expenses. From
that by deducting the non- operating expenses and adding the non-operating income, net
profit is calculated.
3. Cash Flow Statements: It helps in judging the needs of external financing. It measures
the inflow and outflow of the cash in terms of operating, investing and financing
activities. Operating activities includes the changes made in the current assets and current
liabilities, interest and tax payment (Hamid and Loke, 2021). Investing Activities
includes the purchase or sale of fixed assets or any payment related to the merger and
acquisition of the company. Financing activities includes the issuance of equity capital,
debenture, loans, dividend paid.

Ratios: Financial Ratios measures the state between two or more elements of the financial
statements. It gives the pieces of financial information from the financial statements. It evaluates
the company's economic performance which allows the enterprise to be proactive. It evaluates
both the short- term and long- term financial and functional execution which assist in identifying
the trends in the business (Johanson, Almqvist and Skoog, 2019).
Uses of Ratios :
 Comparisons: It evaluates the company's fiscal performance and compare it with the
companies of the same industry.
 Decision-Making: With the help of the financial statements, the gainfulness, trends,
paying and borrowing capacity can be evaluated, which helps to take the correct
decisions.
 Operational Efficiency: It helps is determining the liquidity, solvency and profitability
of the firm. And also represents the efficiency of management at keeping low costs while
generating revenue and income.
 Utilization of Financial Resources: It gives a quantitative information of the company
which assists in determining the over and under utilization of resources.
SECTION 3
(i) Compute information on the 'Business Review Template' in detailing.
The Net Profit for the year 2016 , is £43,057 (2015: £18,987,000).
The Company’s key financial and other performance indicators during the year were as follows:
2016
£’000
2015
£’000
Change
%
Turnover (continuing operations) 189711 179587 +5.6%
Profit for the financial year 43,057 18,987 126.77%
Shareholder’s equity 83,802.75 63,057 +32.9%
Current assets as % of current liabilities 222.00% 304.00% -82%
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 = £81,125
Net Profit = £43,057
Net Profit increased in 2016 by 126 .77 % during the year.
Shareholders’ equity increased by 32.9% by £20,745.75.
The company’s “quick ratio” (Current Assets (excluding stock) divided by Current
Liabilities) is 1.47:1
The company’s “current ratio” (Current Assets divided by Current Liabilities. ) is 2.22:1.
(The calculations are shown in appendix)
(ii) Income statement using Excel.
Included in appendix.
(iii) Completed the Balance sheet using excel.

(iv) Determine the Profitability, Liquidity and Efficiency ratio based on company's analysis
results using case study information.
Profitability Ratio: It indicates the firm's capability of earning gains or benefits by
doing sales operations or equity valuation or on market rate criteria. It is generating profit
and value for the company's shareholders or stakeholders (Oladimeji, Singh and Afolabi,
2021). They are also known as financial grid used by investors or other individuals for the
evaluation of how well a concern utilizes its assets to induce the profit-margin analysis.
There are two sections by which we can calculate this function: Sales and Return basis.

Interpretation: In the above ratio performance analysis, it is clearly seen that net proficiency of
22.7 % is lesser than gross-margin of 42.8%. This actually occurs because non-operating
expenses is there only. At the time of interpreting this, if the firm can brought down their
expenses in future, they will be gaining more returns from now.
Liquidity Ratio: This evaluation process has the most important role in calculating current flow
of the assets and liabilities towards the organization without uses of external amount (Roberts,
Neumann and Cauvin, 2017). It is the consideration for short-term valuation of the businesses.
Interpretation: From the above summary of data, both the ratio's performs extremely well in the
business. Because current ratio is more than 2, so it shows the 'Best' exposure of paying-off
liabilities and quick ratio is also fulfil the implicitness of 1, so it presents the free movement or
liquid portion of the working.
Efficiency Ratio: This is efficient utilization strategy of firm's resources for producing the
income. It is calculate in number of times scenario (Raharja and Kostini, 2021).

Interpretation: The business condition from the calculation of these ratio's have clearly shows the
whole year assessment. The assets turnover ratio is 1.23 times so it is doing, managing and
performing well in the organization. The account receivable and payable ratios have their
receipts and payments are in the same period of 51 or 52 days. But the other fact is that they have
to do immediate payment as they received any payment from outsiders. In this scenario, they do
not maintained enough capital for the emergency period. This becomes conflicts for the
organization. It represents the clear vision of equal or regular moving of cash inflow-outflow
along with the proper maintenance of reserve funds. This is the moderate image for the
organization.
SECTION 4
Describe the structure of business which is using for the improvement their financial
performance along with examples from the case study.
Financial results are the instinctive analysation of how the firms are using their assets at
its primary node and getting adequate revenue from it. Analyst can compare between two
industries or between two years of same company. It can be classified in two types : The internal
focus is for the purpose of firms well-being and achieve its standards key terms. The external
uses for the purpose of grabbing potential opportunities of investments into the concern and take
worthy feedback from the marketplace (Silva, Kimura and Sobreiro, 2017).
In this particular scenario of case, the business's key financial and other performance is
indicating as follows :
1. Due to decrement of non-operating expenses or overheads in current year, we can find
out that Net proficiency automatically increases by 126.77% which improves its potential
nature of stability and growth.

2. High returns in the business can influence shareholder's to invest more money in the
concern for the good profitability.
3. The other perspective of the same position is that current ratio is more than its ideal one
like 2.22. It completes the financial obligations of the firm fully which is 'Good'
significance.
Ways of improvement in company's performance :
1. Workforce management : It depends upon the internal sources of the firm because if
they satisfy by the firm, their productivity increases and cost decreases (Sun and et. al.,
2017). By doing this strategy, it become beneficial for the firm, employees, customers
and so shareholders too. And retained more income from the present time.
2. Promotional Marketing : By showing transparency in the marketplace either in the
profits or products & services, it presents company's loyalty towards the connections of
the company. When shareholder's influence from this, they can do more investment in the
business than previously.
3. Working capital assessment : In this strategy, firm should do control over the
movement of money outside by hold up the payment to outsiders or suppliers. If it is
possible that will be benefit for the utilization of more assets in present period in the
organization. Because in the above case study, current assets reduces by 82% compare to
previous year (Singh and Srivastava, 2018).
CONCLUSION :
It can be concluded from the report that financial management process is most important
for the valuation and exact position of the business. In this particular scenario, we did
exploration of the firm through financial statements practices. From this measurement, it is easy
to finding out the accounting position, performance and what kind of changes occur throughout
the action orientation. It improves the availability of all kind of resources such as profit-margin,
shareholder's engagement, working capital adequate estimation and customer satisfaction with
definite possible ways. The requirements, analysation and the fundamentals of the structure
should be included relevance theory, have some mathematical accuracy, easy to understand and
concise goals & objectivity.

REFERENCES
Books and Journals
Akhtar, A. and Sarmah, A.K., 2018. Construction and demolition waste generation and
properties of recycled aggregate concrete: A global perspective. Journal of Cleaner
Production. 186. pp.262-281.
Duque-Grisales, E. and Aguilera-Caracuel, J., 2021. Environmental, social and governance
(ESG) scores and financial performance of multilatinas: Moderating effects of
geographic international diversification and financial slack. Journal of Business
Ethics. 168(2). pp.315-334.
Fernandez-Lopez, M. and et. al., 2017. Simulation of the gasification of animal wastes in a dual
gasifier using Aspen Plus®. Energy conversion and management. 140. pp.211-217.
Hamid, F.S. and Loke, Y.J., 2021. Financial literacy, money management skill and credit card
repayments. International Journal of Consumer Studies. 45(2). pp.235-247.
Johanson, U., Almqvist, R. and Skoog, M., 2019. A conceptual framework for integrated
performance management systems. Journal of Public Budgeting, Accounting &
Financial Management.
Oladimeji, H., Singh, S. and Afolabi, O.O., 2021. Sustainability and Green Operations
Management: Concept, Theory, and Practice. In Handbook of Research on Climate
Change and the Sustainable Financial Sector. (pp. 134-143). IGI Global.
Raharja, S.U.J. and Kostini, N., 2021. Financial literacy of SMEs in Citarum Watershed Area,
Indonesia. International Journal of Monetary Economics and Finance. 14(2). pp.142-
151.
Roberts, M.L., Neumann, B.R. and Cauvin, E., 2017. Individual Performance Measures: Effects
of Experience on Preference for Financial or Non-Financial Measures. In Advances in
Management Accounting. Emerald Publishing Limited.
Silva, W., Kimura, H. and Sobreiro, V.A., 2017. An analysis of the literature on systemic
financial risk: A survey. Journal of Financial Stability. 28. pp.91-114.
Singh, S. and Srivastava, R.K., 2018. Predicting the intention to use mobile banking in
India. International Journal of Bank Marketing.
Sun, J. and et. al., 2017. Dynamic financial distress prediction with concept drift based on time
weighting combined with Adaboost support vector machine ensemble. Knowledge-
Based Systems. 120. pp.4-14.

APPENDIX
Working out of each of these calculations -
1. Net Profit : Turnover – Cost of goods sold – Overheads
189,711 – 108,586 – 38,068 = 43,057
2. Change in profit % : (C.Y. profit – previous year profit)/ previous year profit *100
(43,057 – 18,987)/18,987*100 = 126.77%
3. Shareholder's equity : P.Y. Equity + Change %
63,057 * 32.9% = 20,745.75
63,057 + 20,745.75 = 83,802.75
4. Current assets as % of Current liabilities : 304% - 82% = 222%
5. Gross Profit for C.Y. = Turnover – Cost of Goods Sold
189,711 – 108,586 = 81,125
6. Shareholder's equity increased by 32.9% by :
83,802.75 – 63,057 = 20,745.75
7. Quick Ratio = (Current assets – stock )/ Current Liabilities
(84,349 – 28,571)/37,928 = 1.47 : 1
8. Current Ratio = Current assets / Current Liabilities
(84,349 / 37,928) = 2.22 : 1
9. **Debtors Turnover Ratio : Net Credit Sales / Average account receivable
=189,711 /26,367 = 7.20 Times
10. **Creditors Turnover Ratio : Net Credit Purchases / Average account payable
= 137,157 / 19,493 = 7.04 Times

 where, NCP = COGS + closing stock – Opening stock
= 108,586 + 28,571 – 0 = 137,157.
Income Statement: