Importance of Financial Management: Concept, Financial Statements, Ratios, and Tools for Improvement

This report explains the concept and importance of financial management, financial statements, and ratios. It also includes a case study on liquidity, profitability, and efficiency ratios. Additionally, it discusses financial performance and tools for improvement. The subject is financial management, and the course code and college/university are not mentioned.

Importance of
Financial
Management

Contents
INTRODUCTION...........................................................................................................................3
Main Body.......................................................................................................................................3
Explain the concept and importance of financial management...................................................3
Section 2..........................................................................................................................................4
Explain Financial Statement and uses of financial statement......................................................4
Section 3..........................................................................................................................................5
(i) Organise Business Review Template......................................................................................5
(ii) Complete the Income statement using excel..........................................................................6
(iii) Prepare the balance sheet in excel........................................................................................6
(iv) By using case study explain liquidity ratio, profitability ratio and efficiency ratio of the
organisation..................................................................................................................................6
4.Meaning of financial performance and tools to improve financial performance.....................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................10
Appendix........................................................................................................................................11

INTRODUCTION
The primary aspect of every business organization is managing its finances. Established
organisation or a start-up business both needs finances. Management principles are applied to the
financial assets and in managing finances of a business. Financial management includes
controlling, strategic planning, organising, strategic planning and directing (Boomer, 2021). In
the following report it has explained about the importance of Financial Management and various
uses of financial reports in an organization. Ratios are calculated to analysis various aspects of a
business organization. Performance of a firm is compared with the financial records of the
previous year or it may be compared with the same company in the industry which operates at
the same level.
Main Body
Explain the concept and importance of financial management.
It is process which helps in planning, organizing, control and directing activities related with the
monetary aspect of a company. It helps in forecasting the long term vision of an organization and
defining its objective and roles that the company wants to achieve in the future. It generally
focuses on multiplying the wealth, earning profits, reducing losses and expenditures. It mainly
focuses on completing the tasks and achieving organizational goals (Butt, 2019). It helps in
adding value to the firm, also helps in expanding business operations and provides innovative
business idea that helps in long term growth of an organization.
Importance of financial management:
 Increases profitability: Financial management mainly focuses on managing funds and
helps in determining the alternative sources from where the fund can be raised. Main
focus of every business is to earn profits which ultimately increases the size of a business.
 Value addition to a business: It helps businesses to add value to their business, results of
which can be seen in the expansion of business. It also helps in determining the answers
of how could be done and what could be done. The actions which helps the organisation
to grow and benefit in long run.
 Motivate Employees: It helps to acknowledge the employees of the organisation
regarding the saving of money and also the assets of the business efficiently. That will
help employees in generating better performance from its past performances.

 Allocation of Resources: It helps in allocating the scarce resources to the places which
helps in generating some sort of income and maximises profits.
 Minimise Cost: It helps in managing cost and also helps in reducing the cost of
production that would enhance the working and sustainability of the organization in
market.
Section 2
Explain Financial Statement and uses of financial statement.
Financial Statement helps in ascertain the financial health of an organization. Final accounts
represent true and fair view of a company. In order to achieve organisational goals, it is
necessary to inspect the financial statement. It mainly contains three types of statement which are
as follows:
Cash Flow Statement: It represents the net cash flow which may be positive or negative. It
involves all the transactions which can be measured in monetary terms. It mainly contains three
types of activities: cash flow from financing activities, cash flow from investing activities and
cash flow from operating activities. Cash flow from operating activities includes transactions
which are part of operating activities of a business concern (Cohen and Malkogianni, 2021)
Investing activities includes purchase and sell of investment activities. Financing activities
includes the activities such as issuing and redemption of debenture and share.
Balance Sheet: It helps to determine the assets of the company and liabilities of the companies. It
includes various heads such as shareholders fund, Non-current assets, Non-current liabilities,
current liabilities and current assets. This statement contains the assets which companies possess
and liabilities that are part of the organisation (Ivanov, Macchiavelli and Santos, 2020).
 Income statement: It shows the expenses incurred and the income earned by an
organization during a period. It includes Cost of Goods sold, operating expense,
operating income, other income, etc.
Importance of ratio in respect of financial management.
A financial ratio or accounting ratio is used to changes between the performance of
business with the other businesses. Implication of ratios is explained as follows:

Determine Profitability: In order to determine the profitability of an organisation different
profitability ratios are used such as, return to equity and return on assets. This helps in
determining the amount invested by the investor and the return received by the investor on such
investment. Gross profit and Net profit are used to measure the sales activities that helps in
generating profit (Kolomytseva, Medvedeva and Kolomiets, 2019).
1. Identify financial risk: Ratios helps in ascertaining the risk associated with the external
environment. It is incurred because of the borrowing of a firm.
2. Planning and Forecasting: Financial records are used for future planning and setting
future goals. Ratios helps in determine the flaws in the final accounts and the areas
where the needs to excel. Further, planning is done with respect to past records and
current performance of the organisation.
Section 3
(i) Organise Business Review Template.

(ii) Complete the Income statement using excel.
In Appendix.
(iii) Prepare the balance sheet in excel
(iv) By using case study explain liquidity ratio, profitability ratio and efficiency ratio of the
organisation.
Profitability Ratio: It is used to measure the capability of an organization to earn profits from the
sales of the organisation. It represents the financial position of a business and check the whether
a business is earning significant amount of profit (Komutputipong and Keerasuntonpong, 2019).
Some of the profitability ratios are as follows: Return on assets, return on equity, Gross profit
ratio, Net profit ratio.

Interpretation: From the above calculated ratio it can be concluded that the amount of
profit earned by the organization in relation to the operating expenses and non-operating
expenses. Gross profit is the amount of profit which is determined after deducting all the
operating expenses. Gross profit is 42.76 % and Net gain is 22.7 % which means the profit is
decreased by 20% because of the operating expenses incurred in the organization.
Efficiency Ratio: It ascertain how efficiently an organisation is managing its finances,
liabilities and assets of the company. It also evaluates the period company takes in order to make
payment to its creditors and recover payments from its debtors. This ratio includes Receivable
turnover ratio, account payable ratio, asset turnover ratio and stock turnover ratio (Litterscheidt
and Streich, 2020).
Interpretation: From the above ratio it can be concluded that on an average, debtors takes
approximately 51 days for the payment and creditors are paid within 52 days from the date of
credit. It means that business will able to realise its cash before the paying to the creditors.
Inventory turnover ratio is 3.8 times which means that on an average it takes 4 months to rotate
inventory in the warehouse. Inventory turnover ratio is 1.23 times which means that the
organization is earning enough revenue to sustain in the market.
Liquidity Ratio: It explains ability of a firm to pay off its current liabilities in respect to the
current assets of the organisation for every organisation, it is mandatory to maintain the
effective liquid assets in the enterprise so that company can operate its day to day
activities in effective manner (Mahalle, Yong and Tao, 2018).

. There are various types of liquidity ratio such as current ratio, acid test ratio and
operating cash flow ratio. These are ratios generally uses current liabilities, inventories and
current assets. The ratios are calculated as below:
Interpretation: From the above calculated ratios it can be concluded that the liquidity of the
firm is quite sound. Ideal Ratio for Current Ratio is 2:1 and for quick ratio is 1:1. It can be seen
in the following case that the firm is able to generate enough cash to pay off its current
obligations which means that organisations current ratio is 2.22 which shows that firm is capable
to conduct its daily operations smoothly and pay off its short term obligations in effective
manner. Hence, an organisation is capable to pay its short term expenses and maintain the
optimum amount of liquid assets in the enterprise. The quick ratio is 1.47:1 for the company, it
can be interpreted that company is capable to pay its obligation of short term nature with most
liquid assets. Therefore, company is able to maintain its current and quick ratio effectively.
4.Meaning of financial performance and tools to improve financial performance.
Financial performance is the complete analysis of the financial records of the organization. The
scrutiny of financial performance helps to know the financial health of the company. It is helpful
for internal as well as external users. By analyzing the financial statement an organization can
take various short term as well as long term decisions. Financial performance is also affected
from the rise in the profit is 126.77% and the reason for the improving profit is that the non-
operating cost such as interest and administrative expenses has also declined (Ullah, 2019).
Satisfaction of customer is also increased through which investment in the business is improving.
The organization capital is also rising with the ploughing of funds by the investors.
The current ratio is also declined to 82% in relation to the previous year, it simply means that
outflow of cash is more than the inflow. The following procedures can be taken to improve the
financial performance:
1. Effective marketing strategies: Every organization is required to improve the working
environment which can be possible by attaining the low cost. The organization should use

digital marketing tools which enables the organization to reach maximum number of
people in very less time in cost effective manner. It also reduces the burden of the
personnel present in the organization.
Allocation of Scarce resources – In every organization, the resources are limited and its uses are
unlimited. Therefore, an enterprise should focus on optimum utilization of resources (Yang and
et.al., 2021).
CONCLUSION
From the above report, it can be concluded that financial statement of every organisation are vital
for decision making process. Company uses several financial ratios such as liquidity ratio to
know about the position of liquidity in the organisation. At the end, some strategies are useful for
enhancing the performance of the organisation.

REFERENCES
Books and Journals
Boomer, M.W.A.K.F., 2021. The Importance of Building a Larger Cadre of Female CFP®
Professionals.
Butt, U., 2019. Profits, financial leverage and corporate governance. International Journal of
Managerial Finance.
Cohen, S. and Malkogianni, I., 2021. Sustainability measures and earnings management:
evidence from Greek municipalities. Journal of Public Budgeting, Accounting &
Financial Management.
Ivanov, I.T., Macchiavelli, M. and Santos, J., 2020. Bank lending networks and the propagation
of natural disasters. Financial Management.
Kolomytseva, A.O., Medvedeva, M.A. and Kolomiets, V.I., 2019, December. System-dynamic
model of managing the budgetary financial resources in targeted programs. In AIP
Conference Proceedings (Vol. 2186, No. 1, p. 050017). AIP Publishing LLC.
Komutputipong, N. and Keerasuntonpong, P., 2019. Accountability perception of Thai
Government: to whom and what counts. Journal of Public Budgeting, Accounting &
Financial Management.
Litterscheidt, R. and Streich, D.J., 2020. Financial education and digital asset management:
What's in the black box?. Journal of Behavioral and Experimental Economics, 87,
p.101573.
Mahalle, A., Yong, J. and Tao, X., 2018, November. ITIL processes to control operational risk in
cloud architecture infrastructure for banking and financial services industry. In 2018 5th
International Conference on Behavioral, Economic, and Socio-Cultural Computing
(BESC) (pp. 197-200). IEEE.
Ullah, B., 2019. Firm innovation in transition economies: The role of formal versus informal
finance. Journal of Multinational Financial Management, 50, pp.58-75.
Yang, X. and et.al., 2021. Jump volatility spillover network based measurement of systemic
importance of Chinese financial institutions. International Journal of Finance &
Economics.

Appendix