Financial Management: Importance, Financial Statements, Accounting Ratios, and Improving Financial Performance

Financial
Management

Table of Contents
INTRODUCTION ..........................................................................................................................3
MAIN BODY ..................................................................................................................................3
Section 1: Discuss about the concept and importance of financial management...................3
Section 2: Describe main financial statements and use of accounting ratios in financial
management............................................................................................................................4
Section 3: By using the template provided:............................................................................6
Completing information on Business review template.................................................6
Using Excel complete balance sheet and describe profitability, liquidity and efficiency of
company by analysing the results of accounting ratios.................................................7
Section 4: Discuss process for improving financial performance of company......................9
CONCLUSION ...............................................................................................................................9
REFERENCES..............................................................................................................................11
Appendix:.......................................................................................................................................12

INTRODUCTION
Financial management can be defined as a tool designed with a motive of managing
assets, liabilities, expenses and incomes of company. It not only manages but also derives them
towards earning maximum profits. They make strategic plans and organise financial activities of
business. This department makes various accounting statements which reveals the profits earned
by firm in a particular time period (Sakouvogui and Shaik, 2020). With the help of these
statements, finance section analysis present position and tries to forecast future trend of
company. This report is divided into 4 sections. It describes the importance of financial
management and main accounting statements. It also discusses about the use of ratios in
managing funds and analysing performance of organisation from data provided in appendix. It
further suggests manner for improving the performance of firm.
MAIN BODY
Section 1: Discuss about the concept and importance of financial management.
Financial management is a function of governing funds and its application. It focuses on
controlling business activities so that maximum profits can be earned from them. It is one of the
most important pillar of firm which creates a balance between profits and expenses by utilizing
resources in an effective manner. The financial management team assists owners in taking
decisions related to investment or disinvestment. It is very much important for an organisation to
manage its funds so that money is not wasted or invested in wrong scheme.
Importance of financial management
 To manage normal business operations- Financial management ensures that overall
operations of company are provided with enough cash so that there is no monetary issue
in carrying out these works smoothly. They manage stock turnover ratios, debtor /
creditor payment period so that company have access to cash and funds can flow
effectively (Jung, 2018).
 Raising Funds- It helps in estimating the amount of funds required by business for
buying any asset or for its expansion or growth. Finance management team then figures
out the different sources of funds which can be adopted for raising capital like shares,
debentures, loans etc. They assists managers or owners in analysing pros and cons of

various modes and selecting most optimum source of fund with low cost and lesser
number of conditions.
 Managing risk-It is also an important aspect of finance management. It helps in
forecasting risks that can appear in future and plans strategies in advance to tackle them.
They create various types of reserves such as depreciation for meeting its known and
unforeseen situations (Bravo and Alcaide-Ruiz, 2019). It always keep a keen sight on the
companies in which they have invested and makes an exit strategy for all its investments
so that firm do not have to face losses.
Section 2: Describe main financial statements and use of accounting ratios in financial
management.
Financial statements refers to group of reports which holds summary of number of
transactions taken place in a particular time period, generally of one fiscal year. These statements
includes sum total of all types of expenses, incomes, assets, liabilities and funds flowed in
organisation. Motive behind framing them is to analyse the financial performance of firm. They
are very helpful for number of stakeholders like government, employees, competitors and
management itself for generating information about its profitability and checking its accuracy
with regards to tax and other calculations. The are various financial statements out of which three
important ones are discussed below:
 Income Statement- It is an important financial statement that calculates amount of profit
earned by business. Profit or loss is ascertained by subtracting expenses from income
earned by firm in a particular accounting year. This report is divided into two parts. At
first, gross profit is calculated by deducting cost incurred on production from amount of
sales. Then balance of indirect gains and expenses is reduced from gross profit to achieve
net profit earned by business (Hamdan and Fadilah, 2017). This statement classifies all
types of expenses and provides a summarized information about various costs. It is used
by various internal as well as external parties for interpreting profitability position of
organisation.
 Balance Sheet- It is a summarised statement of assets, capital and liabilities possessed by
business at the end of financial year. It works on basic formula of assets equals to total of
equity and liabilities. It is divided into two parts on basis of their time period- short
usually for single year and long term for more than one year. Assets or liabilities that are

Importance of financial
management

Table of Contents
SECTION 1......................................................................................................................................3
Introduction............................................................................................................................3
Financial management and its importance.............................................................................3
SECTION 2 .....................................................................................................................................4
Financial statements and use of ratios in financial management...........................................4
SECTION 3......................................................................................................................................6
Business Review Template.....................................................................................................6
Using Excel producing an Income Statement for the Sample Organisation..........................9
This is included within appendix............................................................................................9
Using Excel completing the Balance Sheet............................................................................9
Using the Case study information describing the profitability, liquidity and efficiency of the
company based on the results of ratio analysis....................................................................11
SECTION 4 ...................................................................................................................................12
Ways of improving financial performance of business .......................................................12
REFERENCES .............................................................................................................................14
Appendix:.......................................................................................................................................15

SECTION 1
Introduction
Financial management is one of the greatest aspect which is used by businesses in order
to manage their funds in optimal manner and to perform ground execution of the plans. Financial
management is such plan of action in which process of determining cost and profit is being
exerted. In financial management various dimensions are added such as budgets, expenses and
many others (Abdullah and et. al., 2021) . This report is going to discuss various concepts of
financial management and financial statements along with their importance as well. For an
organisation financial management is holding high degree in which budget forecasting and
financial planning can be made. In the other segment of this report various ratios are calculated
in which clear financial position of the organisation is examined.
Financial management and its importance
For an organisation financial management is associated with various objectives such as
providing business existence, providing appropriate funds to meet expectations of shareholders,
earn higher revenue using existing resources, to earn higher profits and growth within market.
Financial management is highly emphasised over raising funds in such a way that potential
investors and lenders so that they can use their capital in order to create more wealth. With the
help of financial management such pathways can be created within business which would be
helpful in attaining aims and objectives of the organisation (Al-Ali and Nobanee, 2021). The
principles of financial management are linked with planning, organising, directing and
controlling such undertakings within an organisation so that appropriate allocation and
acquisition of funds can be made and in the same manner financial planning can be exerted. In
the modern time this is analsyed that with the help of significant financial planning
organisational goals and carry out the same in effective manner. With the assistance of financial
management estimation regarding funds requirement can be exerted and financial planning can
be developed.
For every business financial planning can be executed as for every business their finance
is regarded as life blood for the organisation in which appropriate money can be earned. With the
help of financial management, investment in fixed asset and working capital can be monitored.
Besides this financial management is having various importances such as:

Financial planning: This is associated with such aspect in which financial necessity can
be decided which leads in developing significant planning. This helps an organisation to develop
their business and meet appropriate business planning to promote the business (Aldhanhani,
2021). With the help of financial management in an organisation financial planning can be
exerted in such a way that business concerns can be executed in prominent manner.
Protection against funds: With the help of financial management , funds against an
organisation can be protected in which organisational goals and objectives can be attained
(Patrisia, 2021). In order to develop smooth business functions this is required to protect funds so
that the same can be used in appropriate forecasting.
Appropriate utilisation of funds: With the help of financial management funds can be
utilised in fuller manner which leads in developing operational efficiency (Fu and Smith, 2021) .
On the other hand using of funds in appropriate manner profitability can be improved within
business and at the same time value of the firm can be enhanced.
SECTION 2
Financial statements and use of ratios in financial management
The financial statements are the formal records of the financial activities and business
position. The financial information is presented in the structured manner which makes easy in
understanding. The main objective of the financial statement is to provided information
regarding the financial position and performance. The reporting on assets, liabilities, income and
expenses are directly related to the company financial position. The financial statement is
required by the managers and owners in making the decisions which affects daily operations.
The financial statements are audited by the government agencies, accountants, and firms etc. for
ensuring accuracy (Block, S.B., Hirt, G.A. and Danielsen, B.R., 2018). The financial statements
are used by investors, market analysts and creditors for evaluating company financial health and
earning potential. The financial statement helps the company in determining whether the
company capability to pay back its debts. The financial results on the trend line is tracked. The
financial statements includes income statement, balance sheet and statement of cash flows.
Income statement- It displays the outcomes of the entity operations and financial activities for
the reporting period. This statement shows the business performance throughout each
period, showing sales revenue. It is expressed over a period of time i.e., 1 year. The use of