Importance of Financial Management

This article discusses the concept and importance of financial management, the use of financial statements and ratios, and processes that businesses can use to improve their financial performance.

Importance of financial management
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Contents
Introduction......................................................................................................................................3
Main Body.......................................................................................................................................3
Section 1...........................................................................................................................................3
Concept and importance of financial management:...............................................................3
Section 2...........................................................................................................................................4
The main financial statements and explain the use of ratios in financial management:........4
Use of ratios in financial management:..................................................................................5
Section 3...........................................................................................................................................6
Section 4...........................................................................................................................................9
Processes this business might use to improve their financial performance:..........................9
Conclusion.....................................................................................................................................10
References......................................................................................................................................11
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Introduction
Financial management is managerial function of a company which is accountable for
acquiring and efficiently using the funds required for productive operational activities (Akhtar
and Liu, 2018). The study covers discussion on definition of financial management and its key
significances in business. Further it overs discussion on key financial statements and uses of
financials ratios along with computations of ratios.
Main Body
Section 1
Concept and importance of financial management:
Financial management is described by Guthman and Dougal as " practice concerned with
effective planning, collecting, managing, and overseeing of funds employed in the enterprise."
Financial management is field of business administration dedicated to judicious utilization of
capital funds and careful selection of financing options in order to allow an expenditure unit to
step in direction of meeting the objectives according to J.F. Brandley (Beinke, Nguyen and
Teuteberg, 2018).
Importance of financial management:
Safeguarding / Securing Funds: One of the most important aspects of the financial management
is the protection of funds in order to achieve business objectives. For a company to run smoothly,
it is necessary to calculate the areas whereby funds are needed and distribute them appropriately
in all fields. Overspending with one project can have a negative effect on other business
activities, particularly if they are short on cash. It's important to keep money secure and invest
carefully.
Allotment of Funds: Allocating funds properly is an important aspect of the financial
management within an organisation When properly allocating finance to properties, business
concern's organizational proficiency improves. Finance professionals may minimize business
expenses and raise capital projected for corporation when they are using funds efficiently and
distribute them wisely.
Investments Opportunities: If business owners are successful at handling thier finances and
investing, they would be able to pursue investments opportunities. Investments opportunities will
help them to build assets so that they can enjoy their retirement years. One may look into various
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investment options such as stocks, jewellery, savings accounts, property, properties, and so on.
One will learn everything there is to understand about investing, including the risks and returns.
You can then select the best investment options based on risk tolerance (Cornwall, Vang and
Hartman, 2019).
Financial Decision: One of the most crucial aspects of framework of financial management is
fiscal decision It is difficult to undo a financial decision based on a market concern. As result,
any money spent wouldn't be repaid if a mistake is produced. Financial decisions can have an
effect on the entire business activity. Because it has immediate partnership with all of business's
divisions. For instance, production, advertisement, rentals, human resource salaries, and so forth.
Economic Development and Sustainability: Effective financial planning would ensure
that business grows and prospers. Progressively, wealth creation will increase, allowing you to
prosper financially. The most important aspect of a person's life is fiscal security. Economic
development is only way to maintain financial sustainability and only manner to do that is by
financial management (Klopotan, Zoroja and Meško, 2018).
Section 2
The main financial statements and explain the use of ratios in financial management:
Income statement: This reveals net profit/loss is among the four forms of financial statements.
This form of statement keeps track of all money coming in as well as heading out. Expenditures
are money that has been paid out, while income is money that has been received. Income
statement would report a net loss if the costs outweigh revenue (Kovacova and et.al. 2019).
Income statement of business is divided into several parts, including:
 Sales and operating costs
 Expenses not related to operations
 Advertisement and office rent are examples of operating expenditures. A one-time
payment and interests on lent funds are examples of non-operating expenditures. The
costs of all items sold is included in sales.
Balance sheet: This is among the four forms of the financial statements, and it appears that of
all financial statements available, this one is most overlooked. The income statement fascinates
entrepreneurs, but they are uninterested in other aspects of financial statements, such as balance
sheet. It's particularly unfortunate since this is among the most critical forms of financial
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reporting. Assets, liabilities, including owners'/shareholders' equity are all listed on balance
sheet. Cash-fund, land, inventory, including any other assets held by the business are included
in assets. Assets are mentioned on left side. On right, a list of liabilities and equity-fund.
Accounts payable and any form of payment rendered on a longer-term loan are examples of
liabilities. If the total of liabilities deducted from amount of assets, owners' or shareholders'
capital is calculated. The equation should always appear like this, which is why it's termed
as balance sheet:
Liabilities + Shareholders' Equity = Assets
Statement of Cash-flows: The declaration of cash flows is third of four main financial
statements. The whole financial statement for a company aims to do one thing: tell where all
of money went. Depending on size of the organisation, number of categories on statement can
vary. The following are the divisions for larger businesses:
 Operating activities
 Investing activities
 Financing activities
 Supplemental information
Statement of owner's equity: This is fourth of major company financial statements, shows any
adjustments in owner's equity-funds between reporting period. The following are the main
components mentioned on this report:
 Equity balance at the start
 Subtractions and additions
 Bringing everything to a close
 Net revenue, dividend payments, including withdrawals are examples of items that can be
added or subtracted over a specific duration.
Use of ratios in financial management:
To evaluate the firms' output
The key benefit of ratio evaluation is that it allows you to assess strengths and disadvantages of
different companies. The ratios could also be contrasted to the corporation's previous ratio,
which will aid in determining if the business has made improvements.
For firm preparing and forward forecasts:
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Researchers and investors may identify a pattern and use this for predicting future, as well as for
important decision-making through external stakeholders including investors They will
determine to choose whether or not make invest in project.
Aids in the identification of the corporation 's financial risks
Another benefit of ratio evaluation would be that it aids in the detection of financial threats.
Ratios such as leverage ratio, interests coverage ratio, including DSCR ratio, among others,
assist the company in determining how reliant it is on foreign capital as well as whether this is
worthy of repaying debt with its own capital.
Aids in the identification of the company's business risks
Among the most significant benefits of accounting ratios would be that it aids in the perception
of the corporation's business risk. Computing leverages financial as well as operating leverages)
assists the organization in determining the market risk, — in other words, how vulnerable the
corporation 's profitability will be to fixed costs deployment and outstanding debts.
The Businesses' Liquidity
The corporation 's liquidity decides whether or not that would meet its shorter-term obligations.
One can refer to short-term liabilities as loans that could be paid-off within a year or operating
period. For instance, unpaid wages, various creditors, unpaid taxes, unpaid expenses, and so on.
Current ratio and short ratio are being used to assess a company's liquidity.
Companies' Operational Effectiveness is Evaluated
Those equations assist us in determining degree of productivity of businesses. Receivable
accounts turnover, fixed-assets turnover, including inventory turnover levels are all examples of
ratios. Such ratios could be contrasted to those of other companies in same sector, allowing you
to see which companies are better run than the rest. It assesses a corporation's ability to produce
revenue from its properties (Kraemer-Eis, 2019).
Section 3
2016 2015 Change
£’000 £’000 %
Turnover
(continuing
operations)
1,89,711 1,79,587 5.60%
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Profit for the 43057 18,987 126.77
Shareholder’s 83802.75 63,057 32.90%
Current assets as %
of current liabilities
55% 304% -82%
Customer
satisfaction
4.5 4.1 10%
Average number of
employees
649 618 5%
Income Statement
2016 2015
Turnover 189711 179587
Cost of Sales 108586 98975
Gross Profit 81125 80612
Administrative Expenses 13751 20251
Other Operating Costs 22374 34293
Interest 1943 7081
Net Profit 43057 18987
Increase in net profit: (43057
18987)/18987 =
126.77%
Net profit:
Year 2016 2015
Net Profit 45057 18987
Net sales 189711 179587
Net profit ratio 23.75 10.57
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As computed here in table, net profit of ratio has been increased from 10.57% in year
2015 to 23.75% during year 2016. This increase in ratio indicate that business’ effectiveness to
generate profit has been rise over the period.
Gross profit:
Year 2016 2015
Gross profit 81125 80612
Net sales 189711 179587
GP Ratio 42.76 44.89
GP ratio of company for 2015 was 44.89% which has been declined to 42.76% during
2016. This decline in ratio shows that business’s efficiency to generate profit form core
operational activities has been declined over the period.
Current Ratio:
Year 2016 2015
Current assets as % of
current liabilities
.55 3.04
Current ratio of business has been declined majorly form 3.04 in year 2015 to 0.55 in
year 2016. This decline in ratio shows that business’s short-term liquidity position has been
decreased over the said period.
Return on Shareholder’s Fund:
Year 2016 2015
Profit 43057 18987
Shareholder's Equity 83802.75 63057
Return on Shareholder's Equity 51.38 30.11
Ratio of company for year 2015 was 30.11 which has been risen to 51.38 in year 2016.
This incremental trend in ratio shows that business’s efficiency to generate return on overall
equity funds employed in business has been declined.
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Section 4
Processes this business might use to improve their financial performance:
As analysed above company’s liquidity position has been declined over the period thus
business should focus towards this area. Sweep accounts, which move funds into the higher-
interest accounts if they're not required as well as back to conveniently accessible accounts
if they're needed, are one approach to rapidly increase a corporation's liquidity percentage
Paying-off liabilities increases liquidity ratio rapidly while still reducing short-term overhead
costs including rent, wages, and advertising. Using longer-term funding rather than shorter-term
financing to buy inventory or fund projects is another way to improve a corporation's liquidity
ratio. Reducing shorter-term debt from balance sheet helps a business to conserve cash and put
that to greater use in shorter term. Examining accounts receivables as well as payable can help
increase a business's liquidity level in long run (Mian and Sufi, 2018). Ascertain that
business issuing invoices as soon as practicable and that clients are paying on schedule
Whenever it relates to accounts payables, Company should make sure that reverse is true: longer
pay periods are better for a business looking to increase their liquidity ratio. Some vendors may
also be persuaded to extend payment terms. The willingness of a corporation to repay its debts is
a vital indicator of its fiscal viability. A corporation that can cover its operating expenditures and
pay off its debts with income generated from its activities and effective resource usage is more
likely to prosper and expand. Examine the company's operating costs to see if there are any that
can be reduced. Profitability is directly impacted by lowering overhead. From outside direct
materials and direct labour, overhead costs such as rent, ads, indirect labor including related
costs are indirect expenses which business incur to run. Company should get rid of any non-
productive properties that company is simply holding. The only purpose to spend cash on assets
like homes, machinery, and equipment/devices is to make money. Obsolete inventory and
completely depreciated properties are examples of unproductive assets. Business don't require
any assets which aren't producing money for corporation. Accounts receivables are payments
rendered on credit and they are often considered asset. Customers who do not pay their credit
cards on time depreciate the asset. Considering creating a system for billing clients second time
and offering bonuses for timely payments. When all other fails, considering hiring collection
agency that only actually pays for whatever they could recover or using factoring service to
finance receivables (Rossi and Gunardi, 2018).
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Conclusion
Form above study this has been articulated that after deciding the capital funding need, a
determination must be taken on the form and proportion of various funding streams. F The
inancial manager must assess the acceptable balance of debts and equity capital fund, and also
various short - term and longer debt ratios, at about this level. The key goal is to optimize
shareholder equity at the lowest possible costs of capital.
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References
Books and Journals:
Akhtar, S. and Liu, Y., 2018. SMEs' use of financial statements for decision making: Evidence
from Pakistan. Journal of Applied Business Research (JABR), 34(2), pp.381-392.
Beinke, J.H., Nguyen, D. and Teuteberg, F., 2018. Towards a business model taxonomy of
startups in the finance sector using blockchain.
Cornwall, J.R., Vang, D.O. and Hartman, J.M., 2019. Entrepreneurial financial management: An
applied approach. Routledge.
Klopotan, I., Zoroja, J. and Meško, M., 2018. Early warning system in business, finance, and
economics: Bibliometric and topic analysis. International Journal of Engineering
Business Management, 10, p.1847979018797013.
Kovacova, M and et.al. 2019. Systematic review of variables applied in bankruptcy prediction
models of Visegrad group countries. Oeconomia Copernicana, 10(4), pp.743-772.
Kraemer-Eis, H., and et.al. 2019. European Small Business Finance Outlook: June 2019 (No.
2019/57). EIF Working Paper.
Mian, A. and Sufi, A., 2018. Finance and business cycles: the credit-driven household demand
channel. Journal of Economic Perspectives, 32(3), pp.31-58.
Rossi, M. and Gunardi, A., 2018. Efficient market hypothesis and stock market anomalies:
Empirical evidence in four European countries. Journal of Applied Business Research
(JABR), 34(1), pp.183-192.
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