Importance of Financial Management and Ratio Analysis for Decision Making in an Organisation

Importance to
financial management

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Nature of reporting and decision making in accounting and financial management in an
organisation.................................................................................................................................3
Explanation of assets, liabilities, equity, revenue and expenses.................................................4
Limitations ratio analysis............................................................................................................9
CONCLUSION..............................................................................................................................10
REFERENCES..............................................................................................................................11

INTRODUCTION
Financial management is the practice which makes the process of organisation planned,
systematic, organised and efficient. Business decisions are made effectively when the managers
have detailed view about the position of organisation. Proper analysis can be achieved through
analysis of the financial statement. Ratio analysis is a tool which is used for evaluating the
financial records of the company and define the stability and growth in in the market of the
entity. These reports and accounts provide information about the profitability, efficiency and
credibility of business entity (Bire, Sauw and Maria, 2019). In this report, importance of
accounting and financial management are to be discussed, also how it is used by mangers to in
decision making is to be defined. Ratio analysis by calculating it from the balance sheet provided
for Star Ltd have to be performed. The organisation is based in UK, it is a medium seized
enterprise which is involved in manufacturing and selling of artificial intelligence based toys.
MAIN BODY
Nature of reporting and decision making in accounting and financial management in an
organisation
An organisation starts its operation in business environment to earn profit and seek growth. In
the process to achieve the organisational goal there are so many activities that takes place which
need to recognised and tracked in order to find out the profit the company made out of the
operations (Boasiako and Keefe, 2021). Accounting is term used to define a practice that is
performed in a business organisation to track, record and monitor the financial activities that is
carried out within the operations on daily basis. In accounting various accounts and statements
are prepared in a systematic way which displays each transaction that took place in reference to
the organisation. This process involves preparation of journal, ledgers and trial balance. Based on
these records final statements are prepared namely the income statements and balance sheet. The
summary of the financial records defines the assets, liabilities, reserves and equity with the firm.
Financial management is a technique in which planning, organising, directing and controlling is
done. It emphasizes on fuller utilisation of resources and increase the productivity of the
organisation. Ratio analysis and interpretation form the part of this management which is used in

decision making. Financial management uses all the tree type of accounting, the financial,
managerial and cost accounting for decision making and analysis. Managerial accounting is used
for performing the evaluation about the profitability, efficiency, liquidity and creditability of the
business entity (Brigham and Houston, 2021). Budgets are also important part financial
accounting which is used for decision making. Budgets are predetermined set of standards
assorted each items such as revenue and expenses are estimated. The actual outcome is then
compared with the projected figures.
Explanation of assets, liabilities, equity, revenue and expenses
Assets are the possession that company owns which can be used for profit making and be
converted cash whenever required. These are of two type current which can be liquidated into
cash easily and non-current which is not readily available for conversion into cash. Some
example of assets are cash and cash equivalent, machinery, equipment, receivables and inventory
(Kiliyanni and Sivaraman, 2018).
Liabilities are the obligation of organisation that need to be paid off. Similar to the assets these
are also of two type current which are to be paid in the period of less than 1 year and non-
current which is to be paid in year longer than 1 year. Example of liabilities are loans,
debentures, trade payable and any other contingent liability
Equity is the amount of the investment that company has raised from the investors in form of
equity share. Reserves, share premium, share capital and allotments form part of share capital.
These items form part of the balance sheet.
Revenue is the inflows that the organisation receives during specific period of time. revenues are
the incomes that is generated from sale of the product and services. Receipts are selling, sales of
assets.