Importance of Financial Management

This article discusses the concept and importance of financial management, financial statements, and the use of ratios in business. It also explores ways to improve financial performance.

Importance of financial
management

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY ..................................................................................................................................1
Section 1: Financial management and its importance..................................................................1
Section 2: Financial statement and the use of ratios in business.................................................2
Section 3: Meaning and calculation of ratios...............................................................................3
Section 4: Discuss the processes the business might use to improve their financial
performance.................................................................................................................................4
CONCLUSION ...............................................................................................................................5
REFERENCES ...............................................................................................................................7

INTRODUCTION
The term business finance refers to increase and manage the funds and credit of company
in order to accomplish the business goals and objectives (Apte and Kapshe, 2020). Finance is the
essential element for the organisation which includes the buying of asset, raw material and other
business activities. The effective role of business finance in an organisation is to ensure that there
are proper resources to manage and operate as well as to invest. It is important to run their
enterprise smoothly and effectively without spending cash and protect the funds for the
investment in future. Finance is needed to meet the problems which occur uncertainly. This
report covers the concept and importance of financial management, financial statement as well as
the use of ratios and improve their financial performance.
MAIN BODY
Section 1: Financial management and its importance.
Financial management is defined as plan the strategy, supervising and controlling of
activities in a company. It involves to apply the management principles to asset of business as it
is essential element of fiscal management. This helps manager to analyse the day to day or
monthly expenses as well as budgets. Manager determine and measure the enterprise efficiency
by appropriate allocation and purchase along with the investment of resources. It assist them to
maintain and decide the source of funds and fixed asset in business which helps to make
decisions effectively. When there is effective financial management in organisation then it leads
to business growth and success. Therefore, there are many tools of financial management such as
managing cash flow, budgeting as well as maintaining budget and financial planning. It helps to
track the flow of cash and liquidity which helps to know that company has money to handle the
liabilities in business (Brigham and Houston, 2021). There are importance of financial
management which are mentioned below:
Financial planning: It helps to understand the need of resources and capital in business
which is done through the planning of finance in an organisation. It determine to take decisions
related to funds as well as investment in company by which they make strategy accordingly. It
design the financial polices in context to controlling of liquidity and borrowing in entity .
Acquisition of funds: It is essential for the allocation of funds while making the
appropriate use of assets which read to operational efficiency. It minimize the expenses and
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increase the capital in business as it result to growth in company. Funds is needed in day to day
operating business activities such as pay off the liabilities and purchasing of fixed asset.
Proper use of funds: Allocation of funds as well as resources which lead to improve the
efficiency in operations of business. Manager use this funds to minimize the expenses, plan the
budget in order to maximize the value of business organisation (Hasibuan and Syahrial, 2019).
Financial decisions: The decisions helps them to manage and understand the business
operations and activities. Therefore, they have to decide the from various sections such as
marketing and production in order to achieve the targeted goals in an enterprise.
Improves profitability: Company improves their finance by using proper resources and
allocate the funds effectively and efficiently. It helps them to control the elements such as ratio
analysis, budgetary control along with the analysis of profit in enterprise which lead to increase
profitability in business.
Section 2: Financial statement and the use of ratios in business.
Financial statement is defined to give information about the organisation assets,
liabilities, income as well as expenses. This helps shareholders to observe and understand their
growth which assist them to invest in business. It is the statement by which it communicate the
company activities and performance in business. The entity financial statement is audited by
accountant and external auditors that enables them to follow the tax rules effectively. Mentioned
below are the three types of financial statement which are:
Income statement: It states that it reflect that organisation face profit or loss in business
as well as income and expenditure for a given period of time. Net income is calculated by
revenue and gains minus expenses and losses in company. The comprises of sales, cost of good
sold, gross profit, marketing as well as operating and non operating income of enterprise.
Balance sheet: It signifies the equity, liability, assets, non current assets along with the
obligations, borrowings at a particular period of time. It is the financial position and summary
which shows the performance of business. It gives the snapshot of overall business activities
which helps investors to invest in their organisation (Marqués, García and Sánchez, 2020).
Cash flow statement: It gives the summary of sum of cash inflow and outflow of
company. Manager monitor the cash position to pay the debts and the expenditure in an
organisation. It is prepared with the both direct and indirect method. In direct method, it
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includes the cash receipts and payments to prepare the statement. It is important for the growth
of business cash position.
Ratios is to identify and measure the profitability and performance of enterprise. The use of
ratios are explained as under:
Comparison: It compares the previous financial performance from the other competitive
company to determine the position of firm in marketplace. It helps to ascertain the strength as
well as weakness which assist shareholder to invest their money which have best financial
stability (Monahan, 2018).
Helps in decision making: It provide various information to take decision from the
financial statement to make the conclusion based on their performance. This give data to the
management which helps them to communicate the use of funds in an entity. The effectiveness
Communicating: By the use of ratios, management as well as shareholders to understand
to enhance the performance of business. This ratios helps manager to communicate the
information to the people who are invested in their organisation.
Supports in planning and forecasting: This is to predict the calculation of number of
years in future. With the help of future prediction it helps them to predict the investment for the
upcoming years. Therefore, ratio analysis helps in planning as well as forecasting.
Section 3: Meaning and calculation of ratios
Net profit: It shows the profitability of business. It also compare the profits from the
similar company in order to recognize the position in organisation. It deducts the revenue from
the cost to generate the net profit.
Net profit margin: Revenue – Cost / Revenue * 100
43057 / 189711 * 100
= 22.69%
Interpretation: Increase in net profit means maximization in the revenue by minimizing the costs
this impacts the increase in sales in business.
Gross profit: It states that the enterprise make profit after subtracting all the costs along
with the buying and selling of products (Plaskova, Prodanova and Reshetov, 2020). It is
calculated from the income statement which is done by by subtracting the cost of good sold from
the sales.
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Gross profit: Cost of good sold – Net sales * 100
81125 / 189711 * 100
= 42.76%
Interpretation: Higher gross profit indicates that maximization of cost of good sold units by
reducing the selling price in products and services. It signifies that company has increase there
sales in business which lead to increase in gross profit. It states that enterprise can pay and meet
all the short and long term obligations.
Current ratio: It is the ratio by which it measure the ability of company to pay the debts
of the given period of time (Shapiro and Hanouna, 2019). It indicates that how enterprise
increase the current assets to fulfil all the obligations in business.
Current ratio: Current asset / Current liabilities
= 54349 / 37928
= 2.22:1
Interpretation: Current ratio of the entity is 2.22:1 which shows that it reflects that the
organisation has twice current assets than the current liabilities. This means than the company
meet the short term financials obligations.
Quick ratio: It is a metric which shows the entity to identify the liquidity position of
business to meet its debts.
Quick ratio: Current asset – Inventory / Current liability
= (84349 – 28571) / 37928
= 1.47: 1
Interpretation: Quick ratio of the company is 1.47:1 which is higher than the 1 that it owns more
assets from its liabilities which indicates that the organisation has best liquidity position in
business.
Section 4: Discuss the processes the business might use to improve their financial performance.
Organisation use various tools and techniques to improve their financial performance.
Company adapt different strategies to gain higher profit and increase their market share,
expansion and implementation of business process which helps them to minimize the expenses
as well as cost. Mention below explain the methods by which enterprise improve their business
performance which are as:
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Minimize company expenses: It is an appropriate way to to enhance the financial
position which help them to reduce costs in business venture (Sklyarova and et.al., 2019). If an
organisation view the performance and activities so that it find the other way such as raw
material, machinery and services. Therefore, management find other title for the accounts as well
as different policies.
Recover outstanding payments: When entity has due receipts and payments then this
affect the flow of cash in business and performance of finances in an organisation. When
company affect this issues then they have to hire agency for the collection of obligations. In
between manager continuously remind debtors of their duty. Debtors know when there payment
is overdue of their payments.
Sell unwanted and unused assets: If in the business place there is some inventory either
unused and unwanted then sold so that the business get some cash in hand. Another way is that
management can put their stocks or items in the auctions to save money. Their are many online
facilities such as eBay and many more websites by which they can sell their unused items online.
Improve your marketing: Enterprise has to implement and follow new marketing
strategies and channel distribution by which they can reach customers in order to targeted
market. There are various platform such as social media, digital marketing, content and by
organising the campaign in the business marketplace.
Apply for business financing: When company apply for business loans and other loans
then management can acquire more capital in business in order to increase profitability and
performance in the venture. Enterprise has to increase their credit score so that they can take the
loan easily and effectively. Organisation raise money from their relatives or any other family
member then it helps them to create better position in the market (White and et.al., 2019).
Use other payment options: They should use different techniques to follow other
payment options such as credit, BPAY, Paypal and from other e-commerce websites which helps
them to improve business performance and attract as well as retain customers to make
purchasing decisions.
CONCLUSION
From the above analysis it is concluded that the business finance is important for the
daily activities and transactions as well as it to know that business is runny smoothly and
effectively. Financial management is planning, organising, controlling as well as directing to
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manage and control the business operations. Financial statement includes income statement,
balance sheet and cash flow statement which determines the business performance and
profitability. Therefore, it helps shareholders to invest in the business organisation. It main
purpose is to allocate proper resources and functions. There are many ratios which company use
which is net profit, gross profits, current ratio and quick ratio. To measure business performance
to track the metrics of an entity so they they improve the business performance in order to fulfil
the goals of an enterprise. There are ways by which they improve their performance such as
minimize company expenses, recover outstanding payments, sell unwanted and unused assets,
improve your marketing, apply for business financing and use other payment options.
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REFERENCES
Books and Journal
Apte, P. G. and Kapshe, S., 2020. International Financial Management. McGraw-Hill
Education.
Brigham, E. F. and Houston, J. F., 2021. Fundamentals of financial management: Concise.
Cengage Learning.
Hasibuan, R. P. S. and Syahrial, H., 2019, August. Analysis of the implementation effects of
accrual-based governmental accounting standards on the financial statement qualities. In
Proceeding ICOPOID 2019 The 2nd International Conference on Politic of Islamic
Development (Vol. 1, No. 1, pp. 18-29).
Marqués, A. I., García, V. and Sánchez, J. S., 2020. Ranking-based MCDM models in financial
management applications: analysis and emerging challenges. Progress in Artificial
Intelligence. 9. pp.171-193.
Monahan, S. J., 2018. Financial statement analysis and earnings forecasting. Foundations and
Trends® in Accounting. 12(2). pp.105-215.
Plaskova, N. S., Prodanova, N. A. and Reshetov, K. Y., 2020. Dealing Operations as a Means of
Improving the Efficiency of the Financial Management of a Production Company. In
Complex Systems: Innovation and Sustainability in the Digital Age (pp. 61-70).
Springer, Cham.
Shapiro, A. C. and Hanouna, P., 2019. Multinational financial management. John Wiley & Sons.
Sklyarova, Y. M. and et.al., 2019. The main directions of development the banking and financial
management system: theory and practice. Indo American Journal of Pharmaceutical
Sciences. 6(3). pp.5615-5619.
White, K. and et.al., 2019. The relationship between financial knowledge, financial management,
and financial self-efficacy among African-American students. Financial Management,
and Financial Self-Efficacy Among African-American Students (October 12, 2019).
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