Importance of Financial Management

This article discusses the concept and importance of financial management for a company. It covers the definition and scope of financial management, as well as the importance of financial planning, proper allocation and acquisition of funds, sound financial decision-making, and improving profitability. It also explains the main financial statements and their use in evaluating a company's financial position, and discusses the use of ratios in financial management for comparisons, determining operational efficiency, trend analysis, and forecasting and planning.

Importance of
Financial
Management

Table of Contents
INTRODUCTION ..........................................................................................................................3
MAIN BODY ..................................................................................................................................3
Section 1: ........................................................................................................................................3
Definition and discussion of the concept and importance of financial management..................3
Section 2 ..........................................................................................................................................5
Describe and discuss the main financial statements and explain the use of ratios in financial
management................................................................................................................................5
Section 4...........................................................................................................................................7
CONCLUSION................................................................................................................................9
REFERENCES .............................................................................................................................10
Book And Journals ..................................................................................................................10
Appendices.....................................................................................................................................11
Section 3.........................................................................................................................................11

INTRODUCTION
Like personal finance management, a company also required a constant flow of capital,
therefore effective financial management is of absolute important for a business. During project
management finance terms in more significant this is because proper accumulations and
availability of finance is necessary for effective project management function. Financial
management is financial administration function which is concerned with the strategical planning
of profitability, expenses and liability and directing or controlling the financial undertaking or
utilisation of the finance of the company (Shapiro and Hanouna, 2019). Following report throw
light on the concept and importance of financial management for a company along with
illustrating different main financial statements which company adopts in its accounting and
auditing. Report also highlight and explain the use of ratio in financial management by
considering its importance and implication in a firm. At the end, measures and ways are
developed by considering the appendices data in which effective process of financial
management might used to improve financial performance of a company.
MAIN BODY
Section 1:
Definition and discussion of the concept and importance of financial management
Definition of financial management
In a business one need money to make money, by considering this it may be not wrong to
say that finance is the life-blood cell of every organisation and it is suggested that there must be
consistent flow of funds in and out of a company. Therefore proper allocation and utilisation of
funds is necessary in order to make money from the money which can be achieved though
financial management. In accounting term, financial management can be defined as the
systematic and disciplined process of planning, organisation, directing and controlling of the
financial undertaking activities such as profits, expenses, cash and credit of a company
(Plaskova, Prodanova and Reshetov, 2020). Financial management is concerned with the
acquisition and utilisation of funds in appropriate way to achieve strategical business goal of
employer. Financial management may be said as the organic function of any firm this is because
every organisation whether small or large and public or private requires finance to abstract
physical resources and carrying out thr business operations in effective and smooth manner.

Scope and nature of finance management
Financial management may be defined as the management principles and practices which
were applied to finance and funds theretofore financial management is said to be an integral part
of whole management which assists in decision making. The fundamental focus of financial
management is valuation of the firm therefore financial management is all about acquisition and
utilisation of the available funds in effective manner to achieve business goals (Okanazu, 2018).
The function of finance management encompass the various activities theretofore the scope of
finance management which include financing raising decision, invest raised funds in asset
through investment decision and distribute returned earned from the asset to the stakeholder in
dividend decision making process.
Importance of financial management
 Financial planning
Financial management supports to demonstrate and ascertain the financial requirement of
the respective business and plays a critical in the financial planning this is because financial
planning is a significant part of a business. Financial planning associates need to take prompt and
rectify the measures despite worrying in later stage of financial management life-style of a
company. Proper allocation and acquisition of funds
Core importance of financial management for a company is to allocate and acquisition of
funds properly. When organisation makes appropriate accumulation of allocated funds it increase
the operational efficiency of a firm (IMPORTANCE OF FINANCIAL MANAGEMENT, 2018).
This is because when appropriate funds are available, firm can ensure undisrupted organisational
operations and funds can be raised from the possible lowest cost from various sources.
 Assist in sound financial and investment decision-making
Financial management is consider to be systematic and disciplined approach which aids
in to take sound financial and investment decision of business concern. Sound financial decisions
are necessary as these can make and wreak any company and can be act as disputer and armoury
tool of business operations (Mahtani and Garg, 2018). Financial management is necessary in
financial and investment decision as one it take place it can not be rewind back.
 Improve profitableness of a company

Making profit is core existence business objectives of a company and the profitableness
of company depends on the effectiveness and appropriate utilisation of finance. Financial
management supports in improving the profitableness position of firm via using the help of
powerful financial control devices i.e. budgetary control, ratio analysis and cost volume profit
analysis. Economic growth and stableness
Proper allocation, management and planning of finance will guaranteed a firm economic
growth, one of the important aspect in business is stability and economic stability can be assured
in business by undertaking financial management principles and practices.
 Valuation of the company and tax planning
A great financial management practices supports in the valuation of the company and financial
management supports in increasing the wealth of the shareholders and investors that will
increase the valuation of the company which promote supports in proper tax planning (Khan and
et. al., 2019).
Section 2
Describe and discuss the main financial statements and explain the use of ratios in financial
management.
Financial statements is one of the important element to find the financial position of the
company. It is helpful in obtaining the real financial condition of the firm. Financial statements
are bring out the statements that is company is having the profits and what kind of profits it is.
Normal profit or super normal profit (Jung, 2018). It helps to cut down the unnecessary expenses
of the company. Financial statements are helps to brings the actual position of the company and
helps to interpret further targets of company and further financial planning model.
There are 4 financial statements.
1. Income Statement- Income statements are one of the major and basic financial
statements. Income statement is also know as the profit and loss statement. Income statement
helps to brings the net profit and net loss during the specific time. Income statements consist of
the expenses and income of the company. It helps to cut the expenses,brings the financial
strengths,help in make the financial decision. It always began with sales and end with net profit
or loss.

2. Balance Sheet - One of the important financial statements for the business
organisation. Balance sheet is the statements which consist of the assets,liabilities. Balance sheet
is the tool that helps to find the current assets and current liabilities of the company (Drummond,
2018). Balance sheet measures the overall assets and liabilities and take the proper evaluation of
them. Balance sheet helps to make the strategies of the company and help to evaluate the other
strategies.
3. Cash Flow Statements Cash flow statements are those statements which helps to
measure the cash present status. It consist of three activities. Operating, Financing and Investing.
These activities helps to measures the operation expenses, Buying and selling of assets and
Issuing and redemption of shares and dividend paid and receive. All these activities are come
under these activities.
4. Retained Earning- Retained earning statements are those statements which comes at
the last. Retained earnings are the profits that can be used for the pay off of liabilities and
investment. It is also know as statements of shareholders equity or equity statement. It is not
considered as the main financial account but it keep a track of earnings of the business.
The use of ratios in financial management.
Ratio analysis in financial management is analysis and interpretation of financial
statements. Ratio in financial management is used for support in making certain decisions by
establishing and interpretation of various ratios (Ratio Analysis - Overview, Uses, Categories of
Financial Ratios, 2019). Moreover, ratio analysis practices undertaken for better understanding
of financial strengths and weaknesses of a company. In ratio analysis, auditor and analyst
depends on the present and past financial statements data in order to made interpretation and
evaluate the financial performance of a company. Uses of ratio in financial statements are as
follows-
 Comparisons-
The foremost uses of ratio in financial management is to make suitable comparisons and
interpretation of company financial performance with its industrial rivals to get insight about the
company's position in operating market. Moreover, many companies are also using financial
statements to compare its present and past performance and ascertain company competitive edge,
strengths and weaknesses.
 Determine operational efficiency

Many financial experts are also using ratio in financial management to ascertain the
degree of efficiency in the management of assets and liabilities of a company. Through ratio
analysis firm can determine the efficiency and inefficiency use of assets which can cater
unwanted and variable expenses that affect company's profitability (Arnold, and Lewis, 2019).
Also, financial ratio can also be used in financial decision-making by determining if the financial
resources are complete or under-utilised. Ascertaining trade-line
Many organisations are using ratio analysis tool in financial management process in case
they observe any trend in the financial performances by accumulating data from the financial
statements over a huge number of reporting period. The trend that determine in ratio analysis
can be used to forecast the direction of future financial performance. Supports in forecasting and planning-
Ratio analysis in financial management is useful in financial preparation and prediction
ahead activities and functions by scheming number of years. These ease in freehanded capable
cognition which is exercise by shareholder and capitalist they develop their further action of
investment. Ratio analysis further provides idea over the financial position of the company to the
external-interested users of the company.
Section 4
Net profit ratio- Net profit indicates the after tax profit to net sales, net profit is used to
reveals the remaining profit after deduction of all direct and indirected cost and expenses. Net
profit ratio are probably used by the company to demonstrate the profitability position of a
company.
Net profit margin= 43057/189711*100= 22.69%
Gross profit- Gross profit ratio is a financial ratio that is used to measures the effiency of
performance by segregating its gross profit total by the totals net sales. Gross profit shows the
part of profit developed via the sales of product and services before selling and administration
expenses. Gross profit indicates the profits earned by the company from its core operations
(Arnold, and Lewis, 2019). Gross profit can be calculated by subtracting all the operations
expenses of a company from its net sales.
Gross profit margin- 81125/ 189711*100=42.76%

Current ratio – Current ratio is a type of liquidity ratio which company is using to
evaluate and measure firm's capableness to pay short-term obligation which are due within one
year. Current ratio can be derived by dividing current asset with the current liabilities of a
concern business. Therefore-
Current ratio= Current assets/ Current liabilities
= 54349/37929= 2.22:1
Quick Ratio- Quick ratio is a analytical practices in which business demonstrates firm's
short-term liquidity position and evaluate firm's capableness to meet its short term liabilities with
its most liquid assets. This ratio also known as the acid test ratio an ideal ratio should be 1:1.
Although, quick ratio is used to guess the liquidity positioning of a concern business.
Quick ratio = (Current assets- inventory)/ current liabilities
= (84349-28571)/ 37929
= 1.47:1
The above carried out ratio analysis explicate that the efficiency level of a concern
business organisation is rendering high degree of profitability in contrast to its operational
activities. From the above carried gross profit it can be concluded that the concern business is
generating maximum level of gross profit margin. On the contrary to this statement, it is being
advised that firm should improve its net profit margin which can be achieved by reducing the
unnecessary administration expenses (Ratio Analysis - Overview, Uses, Categories of Financial
Ratios, 2019). The carried out illuminate that the financial position of the company is appropriate
and stable, therefore it is being advices that company might required to harness its efficiency by
necessitate unwanted variable expenses which can be achieved by proper incorporation of
financial management which supports in harnessing and enhancing profitability and proficiency-
level of a concern business.

CONCLUSION
Thus, as per the carried out study financial management can be count as the life-blood
cell of a business hence report concluded that proper allocation and utilisation can make and
wreak any company. Financial management offer a firm to evaluate its financial stability and
positioning and formulate recommanded financial planning of a business. Following research
presents the key importance of financial management for a business along with scope in a
business. Report has concluded and demonstrate the various financial statements which business
are using along with ratio-analysis in a financials management.

REFERENCES
Book And Journals
Arnold, G. and Lewis, D. S., 2019. Corporate Financial Management. Pearson UK.
Drummond, C. K., 2018. 2. Financial Statements. In Financial Decision-Making for
Engineers (pp. 21-72). Yale University Press.
Jung, H. I., 2018. Restaurant Financial Management: A Practical Approach. CRC Press.
Khan, H. U. R., and et. al., 2019. Financial management of natural resource market: Long-run
and inter-temporal (forecast) relationship. Resources Policy, 63, p.101452.
Mahtani, U. S. and Garg, C. P., 2018. An analysis of key factors of financial distress in airline
companies in India using fuzzy AHP framework. Transportation Research Part A:
Policy and Practice, 117, pp.87-102.
Okanazu, O.O., 2018. Financial management decision practices for ensuring business solvency
by small and medium scale enterprises. Acta Oeconomica Universitatis Selye, 7(2),
pp.109-121.
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.
Online
IMPORTANCE OF FINANCIAL MANAGEMENT, 2018. [online] Available through:
<https://www.linkedin.com/pulse/importance-financial-management-hamza-kileo>
Ratio Analysis - Overview, Uses, Categories of Financial Ratios, 2019. [online] Available
through: <https://corporatefinanceinstitute.com/resources/knowledge/finance/ratio-
analysis/>

Appendices
Section 3
Income statement
Balance Sheet

Business review