Financial Statements: Importance of Financial Management, Financial Ratios and Analysis

Financial Statements

Contents
INTRODUCTION...........................................................................................................................2
SECTION 1......................................................................................................................................2
Explain Financial management and concept of financial management.................................2
SECTION 2......................................................................................................................................3
Elaborate financial statement and uses of financial ratios......................................................3
SECTION 3......................................................................................................................................5
()1) Business Review Template..............................................................................................5
Fill the income Statement.......................................................................................................5
Complete the balance sheet in excel.......................................................................................6
Analysis of the profitability, liquidity and efficient ratios.....................................................7
SECTION 4....................................................................................................................................10
Analyse and give recommendation for the improvement of financial performance............10
CONCLUSION..............................................................................................................................11
REFERENCES..............................................................................................................................12
APPENDIX....................................................................................................................................13
1

INTRODUCTION
This case study mainly talks about the concept of financial management and the importance
of financial management in the organization for achieving the goals very effectively and
efficiently. Basically it helps the organization to make financial plan, allocation and utilisation of
funds and assist to make financial decision and it only happen when the firm plan its activity
properly, organize the structure of plan, hiring more candidate if required to perform the task and
then direct and control the employees to manage the activity into the firm with full efficiency. In
this case study it should also discuss about the use of ratios which show the performance of an
enterprise, then find the profitability, liquidity and efficiency ratios of the company to know the
actual position and then suggest some area of improvement in the financial performance of the
business (Aflatoni, 2019.).
SECTION 1
Explain Financial management and concept of financial management.
This is one of the most important part of every business because the activity of every
organization depends upon the financial management of the company without the proper strategy
no company can achieve the goals of the organization. On the other hand, it’s also necessary for
every organization to direct its finance effectively and efficiently. Now, let's talk about the main
concept of financial management. It is the area of activity in which company is answerable for
prevailing and utilization of funds very effectively and its needed for efficient performance or it
can also say that the financial management involves planning the activity, organizing the
structure, directing and controlling the employees of the organization for the financial task of the
business like; acquisition and proper utilisation of funds of a firm (Biplob and Abdullah, 2019).
Importance of financial management
 It assists the firm to make financial plan: In this step financial planning is very helpful to
achieve the objectives of the firm but it can only possible when company prepare a
proper strategy to achieve the targets of the organization and work according to the plan
and follow all the steps then in that case company definitely achieve the targets of the
firm because planning already decided in advance what to do, who is to do and how to
do. Its easier to analyse the individual task into the organization.
 It assists the firm in effectively utilising and allocating the procurement of funds
received: In this point if a company don't want to increase their expenditure then they
need to utilize the resources properly and use the funds into the effective work so the
organization achieve its efficiency in work and in less time with minimum efforts. In
financial management with the help of planning it's very easy for the company to the best
use of funds through proper strategy. In this point it also need to understand that while
employees of the organization performing the task then it should be done in proper
manner without wasting the any resource with using proper utilisation of funds.
 It assists the firm to take important financial decisions: In this point financial
management help the organization to take important financial decision related to the
organization with the help of all the functions of management. If company facing any
issue while performing the task, then it helps to analyse the issue and try to fix that
problem into the business before expansion of that particular problem.
 It assists the business to make in a profitable situation: if company perform the activity
with the proper planning and first organize the structure of task and analyse the actual
2

manpower required in the organization to perform the task and in last direct and control
the employees of the company and provide them proper feedback of their work and
maintain good relation with them then definitely firm can achieve the targets and earn
more profits.
 Encourage employee to save money for their future financial necessities: This is a very
important point in the context of the employee because it talks about in favour of
employee. Basically it says that employees of the organization should try to save money
for their future financial requirement because future is uncertain and if they retain money
then it will definitely fulfil its requirement in future (Braune, Charosky and Hikkerova,
2019.).
SECTION 2
Elaborate financial statement and uses of financial ratios.
Financial statement indicates the financial position and growth of the company or how much
the company can generate cash. Financial statement keeps a record of day to day activities and it
creates a framework of financial statement. It shows the profitability and ability to stay of a
company. It contains the income statement, statement of cash flows and balance sheet.
Advantages of financial Statement
 It helps to analyse capability of a company to make cash and also help to describe the
sources and utilization of that cash.
 To analyse business strength to pay back their outstanding.
 It helps to describe the company position by calculating ratios.
Types of financial statement
 Income Statement = Income statement is also known as profit and loss statement. It
usually prepares monthly, quarterly or annually and shows earning and expense of a
company. It also shows whether the earnings of the company are positive or negative. It
includes revenue, operating expenses, interest, income tax, wages, etc.
Net Profit = Revenue – Cost of goods Sold
 Balance Sheet = Balance sheet shows the assets and liabilities of company and also
analyse whether the income statement is prepared correctly or not. It shows true and fair
view of financial statement of a company and how the assets are capitalized either debt or
Equity. It also refers to book value or shareholder's equity. Difference between the total
assets and total liabilities is equal to the position of the company in the market.
Equity = Total Assets – Total Liabilities
 Cash Flow Statement = Cash Flow statement shows the cash inflows and cash out flows
during a period. In other words, it describes the activity of cash and describe in the books
of cash flow statement. It prepares form the day when business is start-up and then it
includes all inflows and outflows. It records the activity of cash daily, weekly or monthly.
Use of ratio in financial Statement
Ratio Analysis is used to identify the company financial position, growth, effectiveness and
efficiently utilization of resources and It is also indicating the comparison of financial results that
can be helpful for make effective decision and it is generally calculated quarterly and annually. It
usually identifies how efficiently the company can cover its outstanding debts. It used to identify
the link between two or more factors of financial statement. Following are the importance of
ratio analysis in financial statement (Gathungu and Sabana, 2018).
3