Importance of Financial Management - Desklib

This report discusses the concept of financial management, financial statements, types of ratios, and business performance review. It emphasizes the importance of financial management in organizations and suggests ways to improve financial performance. Subject: Finance, Course Code: NA, Course Name: NA, College/University: NA

IMPORTANCE OF
FINANCIAL
MANAGEMENT

Table of Contents
INTRODUCTION...........................................................................................................................3
SECTION 1.....................................................................................................................................3
SECTION-2.....................................................................................................................................4
SECTION-3.....................................................................................................................................6
SECTION-4...................................................................................................................................10
CONCLUSION..............................................................................................................................10
REFERENCES................................................................................................................................1
APPENDIX......................................................................................................................................2

INTRODUCTION
Financial management would also be defined as management of finance and its distribution
and availability across various department of the companies. It also includes an application of
management principles towards the financial assets of the organization (Prihartono and
Asandimitra, 2018). Likewise, with the help of financial ratio, the financial efficiency and
capacity of the company would be able to get determined. This report will discuss about the
concept of financial management along with an analysis of the financial ratio. Likewise, the
ways through the financial performance of the company would be raised would also include in
this report.
SECTION 1
Financial management:
It refers to the strategic planning, organizing, directing along with controlling the
financial undertaking that is associated with the organization. With the aspect of financial
management an analysis of the need of finance across the organization is performed along with
the determination of adequate planning so that the appropriate funds will be made available to
organization (Brigham and Houston, 2021).
Importance of financial management:
It is one of the important function of the organization that guides the proper utilization
and allocation of funds across the organization. It also assists the organization in the
minimization of cost and expenses. Financial management would enable the organization to raise
the financial value in terms of efficient management of funds and its utilization. Financial
controlling is one of the major importance that is associated with the financial management i.e.
with the help of financial management the un-appropriate expenses will be reduced along with
the measurement of the funds that is apportioned across various departments and activities.
This means it assist the organization in effective management of money so that the
working operation of the company would never be stopped and an adequate availability of funds
would be maintained (Block, Hirt and Danielsen, 2018). This would also be right to state that
with the aspect of financial management the decision making that would be related with the
execution of plans and strategies would be able to executed along with the framing of strategic
plans in relation to the business. This would be right to said that with effective financial

management the profitability of the company would be improved along with the reduction of
expenses.
SECTION-2
Financial statements:
Financial statements refer to the financial reports that depict the financial information
about the company. With the aspect of financial statement, the financial health and condition of
the company would be able to determine (Seifzadeh and et.al., 2020). Financial statement can
also be defined as formal records of financial activities and position with respect to business and
person.
Types:
The major type of financial statements would include:
Income statement:
It is one of the important and major financial statement that depict the information
regarding profit and loss of the company that is further related with the company’s activity. With
the analysis of the income statement of the company the financial situation in terms of
profitability and loss situation would be able to get determined. This statement shows the income
as well as expenses in relation with business (Oh and Penman, 2020). This means that with the
help of this statement an analysis of expenses and income would be able to determine that would
lead to controlling of expenses and raising of income.
Balance sheet:
It is also an important financial statement that depict the financial position of assets,
liabilities and equity in relation with the company. It provides the snapshot of company’s
financial position at a point of time. The balance also expresses the company’s total assets and
how the assets would be financed i.e. either through the mode of equity or through debt. It is
based on the fundamental equation that is Assets = Liabilities+ equity.
Cash flow statement:
As per this statement the cash flow in relation to the company would be determined. This
is one of the important and major financial statement that depict the flow of cash in and out of
the company. With the aspect of cash flow statement, a summary of all the amount of cash and
cash equivalent that enter and leave the company would have been able to analysed (Khansalar

and Namazi, 2017). This will enable the company to make analysis of the cash position that
means how well the company is able to generate the cash and pay its debt obligations.
Shareholder’s equity statement:
It is a part of the company’s balance sheet which is separately issued by the company. It
measures the changes that are related with the change in shareholder’s equity or ownership
interest in relation with the company. This statement shows all the changes that are associated
with the shareholder and equity of the company.
Use of ratio in financial management:
Financial ratios are one of the important aspect in relation with the company and the
determination of financial health and efficiency of the company (Easton and et.al., 2018).
Financial ratio is calculated with the help of analysis of financial statement.
Importance:
Financial ratio also assists in the determination of financial efficiency of the company.
Financial ratio also enables the company to make comparison with the actual and standard
performance and thus assist the concerned company to take corrective actions in respect to the
deviation. This means with the help of analysis of financial ratio the controlling would be able to
get performed. Financial ratio also assists the company in planning of necessary steps that would
lead the company to garb success and financial feasibility.
Types:
The major types of financial ratio would include:
Profitability ratio:
As per its name suggest its meaning that profitability ratio determine the profitability
aspect of the company. With the help of profitability and its concerned ratios, the company
would determine that whether it is incurring loss or profit. This ratio determines the company’s
capability with respect to earning of profit through the mode of sales of its product. It includes
the gross profit, net profit and various other ratios.
Liquidity ratio:
These ratios are related with liquidity that how efficient the company is with regard to
making short term repayment of its liability. This means liquidity ratio measures the company’s

capacity with regard to making payment of short terms debts. It includes current ratio, quick ratio
(Rashid, 2018).
Turnover ratio:
With the aspect of turnover ratio, the company’s capacity and efficiency would be
determined that how well the company is using and employing its assets and inventory in order
to make generation of revenue. It majorly includes the asset turnover ratio, inventory turnover
ratio (Khan, 2017).
SECTION-3
Business performance review:

From the above analysis of the business review it would be observed that the profit of the
company is raising in 2016 while making it compared it with the year 2015. This can be
evidenced from the above table that in 2015 the profit was 18987 and in 2016 it become 43057.
This means there is an increase of 127% was observed in net profit of the company.
Likewise, while making an analysis of the shareholder’s equity there is an increase of 32.9% was
seen. This is because in 2015 it was 63057 while in 2016 it become 83802. This means with a
raise in the shareholder’s equity more amount would be made available for the shareholder for
distribution after making a payment of liabilities.
Other than an analysis of business review, while making an analysis of ratio, the financial
performance of the company would be able to get determined. As per the liquidity ratio analysis,
it was observed that the current ratio of the company is 2.22 while that of quick ratio is 1.47. As
the ideal current ratio lie between the range of 1.5 to 2 while making an analysis of the company
it was found that the ratio was 2.22. This means that the ratio of the company was high which
shows that the company hold more liquidity as required. This also indicate that the company hold
more cash rather than deployed in some investment. The same aspect can also be evidenced with
the quick ratio i.e. 1.47 which is also high than idea ratio of 1:1.
While making an analysis of the profitability ratio it was observed that the company’s
Net profit ratio was 22.7%, its gross profit ratio is 42.8%. These ratios indicate that company’s
profitability was moderate because they are showing an inclining trend i.e. raising state. This can
also be right to said that although the net profit of the company is good i.e. 22.7% which indicate
the good profit ratio >20%. But in case of Gross profit the company’s situation is moderate
because the ratio of the company is 42.8% which is lower than ideal ratio of 65%. Thus the
overall profitability of the company is lied in the moderate state.
Likewise, in case of efficiency ratio including the inventory and asset turnover ratio, it can
be interpreted that the company’s asset turnover ratio is 2.26 while the stock turnover ratio is
105.36 days. This means that the company’s efficiency with the utilization of assets is 2.26
which indicates that it shows the high efficiency. This is because while making it compared with
the ideal ratio i.e. 2.5 or more, the ratio of the company comes high. Likewise, the company’s
stock turnover ratio is showing a high ratio which shows that the it takes time in order to resell
and restock its inventory.

In case of analysing the debtor collection period and creditor’s payment period it was found
that the ratio was 54 days and 72 days. These ratios interpret that company’s has adequate
collection and payment period because shorter the collection period would enable the company
to have collection of funds on right time and thus making it efficiently invested. Likewise, with
the aspect of high payment period the company would get sufficient time for repayment and thus
raise the interest earning by the deployment of funds.
SECTION-4
Although as per the above case the company’s financial performance is adequate but at the
same time it is also observed that the company’s performance in terms of profitability, liquidity
and other aspect need to be improved. This is because while making analysis of the financial
ratio it was also analysed that majority of the ratio of company are declining. In order to make
improvement in the company’s financial performance various steps in terms of selling of non-
useful assets, recovery of debts, offering discounting policy for the recovery of debts,
consolidation of debts and various other option it can take. Also, as the profitability of the
company is declining which would be raised with the aspect of making focus towards the
marketing and pricing strategies. This means through the mode of effective marketing more
awareness regarding the company and its products would be raised that will lead to raise the
proportion of sales of the company. In the same way with regard to the focus overt the pricing
strategies in terms of raising of prices more profit would be earned by the company and thus
improves the financial performance. In the same way with respect to the raising of financial
performance the company may work over the aspect of deduction of expenses and thus enhance
the percentage of profitability. In the same way with respect to the selling of not useful assets the
company may improve the asset turnover ratio along with enhancing the financial performance.
CONCLUSION
From the above report it can be concluded that financial performance of the company can
be analysed with the aspect of analysis of financial ratio as well as its financial statements. With
the aspect of financial management, the company can make efficient management of its funds
and making it properly apportioned. This report also summarizes that with the aspect of analysis
of financial statement through which the financial health and efficiency of the company would be

able to get determined. Along with this various practices through which the financial
performance of the company would be improved is also concluded and understood with this
report.

REFERENCES
Books and journals
Block, S.B., Hirt, G.A. and Danielsen, B.R., 2018. Foundations of financial management.
McGraw-Hill Education.
Brigham, E.F. and Houston, J.F., 2021. Fundamentals of financial management. Cengage
Learning.
Easton, and et.al., 2018. Financial statement analysis & valuation. Boston, MA: Cambridge
Business Publishers.
Khan, A.K., 2017. Analysis of Financial Statements. Karachi: University of Karachi.
Khansalar, E. and Namazi, M., 2017. Cash flow disaggregation and prediction of cash
flow. Journal of Applied Accounting Research.
Oh, H.I. and Penman, S.H., 2020. Income Statement Mismatching Has Not Reduced the
Information Conveyed by Accounting Over Time. Available at SSRN 3778173.
Prihartono, M.R.D. and Asandimitra, N., 2018. Analysis factors influencing financial
management behaviour. International Journal of Academic Research in Business and
Social Sciences. 8(8). pp.308-326.
Rashid, C.A., 2018. Efficiency of financial ratios analysis for evaluating companies’
liquidity. International Journal of Social Sciences & Educational Studies. 4(4). p.110.
Seifzadeh, and et.al., 2020. The relationship between management characteristics and financial
statement readability. EuroMed Journal of Business.
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APPENDIX
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