Importance of Financial Management

This report discusses the importance of financial management in business and its impact on financial decision-making and overall success. It covers different types of financial statements, such as balance sheets and income statements, and explains the use of ratios for analysis. The report also provides recommendations for improving financial performance. Study material on this topic is available on Desklib.

IMPORTANCE OF
FINANCIAL
MANAGEMENT

TABLE OF CONTENTS
INTRODUCTION...........................................................................................................................3
SECTION 1......................................................................................................................................3
Financial management................................................................................................................3
SECTION 2......................................................................................................................................3
Main financial statements and use of ratios................................................................................3
SECTION 3......................................................................................................................................4
i. Business review template..................................................................................................4
ii. Income statement...............................................................................................................5
iii. Balance sheet.....................................................................................................................5
iv. Ratio analysis.....................................................................................................................6
SECTION 4......................................................................................................................................8
Process that business might use to improve the financial performance......................................8
CONCLUSION................................................................................................................................9
REFERENCES..............................................................................................................................11
APPENDIX....................................................................................................................................12

INTRODUCTION
Financial management is defined as the strategic planning and organizing of the financial
undertaking within the company. This is helpful as the company will be able to manage the
working relating to finance in such a manner that it will assist company in developing more
accurate financial statements. The present report will outline the importance and different types
of financial statements. Further it will also outline the preparation of different types of financial
statements.
SECTION 1
Financial management
The concept of financial management is about to manage the financial resources of the
business entity. Resources are segregated into financial and non- financial. In context to the
financial management only financial resources are monitored and controlled. This involves
planning of financial resources, analysing potential sources to generate funds, monitor the utility
of the financial resources and also to control the financial decision-making of entity (Bapat,
2019). Concept of financial management is based on the objective of achieving bets level of
outcomes against utilisation of financial resources of the entity. The aim is to take decisions that
can the best lead to address the maximum potential outcomes for the entity.
Importance of financial management
Financial management is among the crucial operation direction associated with the
management. All decisions taken under the financial management in organisation are based on
the strategic direction of the business entity. This whole management is important as it allows the
entity to maximises the potential outcomes against the financial decision-making taken by the
management. This is further crucial as unlike other resources such as human resources and many
other financial resources are limited in number which requires board of directors to take best
level of decisions related to financial planning, monitoring and control of company's financial
resources to gain the best level of stability against the financial decision-making.
SECTION 2
Main financial statements and use of ratios
Financial statements are segregated into different parts demonstrated in the following
manner.

Balance sheet: Balance sheet is among the most prominent financial record. This demonstrates
the balance between assets of business entity and liability of the organisation. This also include
capital invested by the owner in business and also the profitability share devoted to the capital of
shareholders.
Income statement: Income statement is the reflection of company's expenditures and income of
the respective financial year. This statement only consumes the financial information of the
respective financial year.
Cash flow statements: Cash flow statement is the financial record demonstrate the use of cash.
This statement also disclose about the liquidity position of the business entity in the respective
financial year. Cash flow statement also allow the business entity to take decision related to
controlling of expenditures of the respective financial year. This statement motivates the
management to improve the liquidity management in company.
Use of ratios
Ratios are the most prominent way or technique to take decision in business. Ratios
disclose all aspects of business outcome such as profitability, liquidity and all other elements.
Company management can make the best level of decision in business with support of ratios.
This practice support the entity not only plan business operations for future strategic growth but
also take control the business operations (Vanauken, Ascigil and Carraher, 2017). Ratios can also
be sued to monitor the operations of the business entity. Use of ratios are also conducted in
maximising return through improving business decision-making.
SECTION 3
i. Business review template
2016 2015 Change
£’000 £’000 %
Turnover (continuing operations) 189,711 179,587 5.60%
Profit for the financial year 43,057 18,987 126.8
Shareholder’s equity 83802 63,057 32.90%
Current assets as % of current liabilities 222% 304% -82%
Customer satisfaction 4.5 4.1 10%

Average number of employees 649 618 5%
Gross Profit = £81125
Net Profit = £43057
Net Profit increased in 2016 by 126.7 % during the year.
Shareholders’ equity increased by 32.9% by £83802.
The company’s “quick ratio” (Current Assets (excluding stock) divided by Current
Liabilities) is 1.47:1
The company’s “current ratio” (Current Assets divided by Current Liabilities.) is 2.22:1
ii. Income statement
Covered in appendix.
iii. Balance sheet
Balance sheet as at 31 December 2016
Particular Amount
Non- Current assets
Intangible assets 5,793
Tangible assets 52,812
Investments 10,693
69,298
Current assets
Stocks 28,571
Trade debtors 26,367
Short term deposits 14,779
Cash at bank and in hand 14,632
84,349
Current liabilities
Bank loans and overdrafts 9,610
Trade creditors 19,493
Other Creditors 678
Income tax payable 3,585
Other creditors including tax and social security 4,562
37,928
working capital 46,421
Total assets less current liabilities 115,719

Non-Current Liabilities
Bank loans and overdrafts 16,506
Other Liabilities 7,304
23,810
Provisions for liabilities 8,094
Net assets 83,815
Capital and reserves
Called up share capital 39,436
Reserves 1322
Retained earnings 43,057
Total equity 83,815
iv. Ratio analysis
Profitability
Gross profit ratio Formula 2016
(Gross profit/ sales) * 100 42.76
GP 81125
Sales 189711
Net profit ratio Formula 2016
(Net profit/ sales) * 100 22.70
NP 43057
Sales 189711
Interpretation- for analysing the success of the business it is essential that they undertake
the profitability of the company to a great extent (Holynskyy, 2017). The major reason pertaining
to the fact is that when the profitability of the company will not be good and effective then this
will assist the company in deciding how to improve the profitability. By referring to GP ratio it is
clear that it is 42.76 % which is good for the better working of company. In addition to this NP
ratio of company is 22.70 % and this implies that company is having more of the indirect

expenses. This is particularly because of the reason that when indirect expenses are high then
only the net profit has reduced to a great extent.
Liquidity ratio
Current ratio Formula 2016
CA/ CL 2.22
CA 84349
CL 37928
Quick ratio Formula 2016
(CA- stock)/ CL 1.47
CA 84349
CL 37928
Stock 28571
Interpretation- the liquidity outlines the ability of the company to convert the current
asset within the cash easily. This is particularly because of the reason that when the company
will not be having liquid asset then this will affect the ability of company to pay off its current
liabilities. The current ratio of the company is 2.22:1 which is little more than the ideal ratio of
2:1. This ideal ratio interprets that when the company has two current assets against paying off
one current liability then this is good for liquidity position of company (Baryła-Matejczuk and
et.al., 2020). in addition to this the quick ratio of company is 1.47: 1 which is more than the ideal
quick ratio of 1: 1. The ideal ratio of 1: 1 states that company is in position of paying off its
liabilities with help of the quick assets. In case the quick ratio will be too high for the company
then this is not good for the company. this is pertaining to the reason that company has invested
too much amount within the inventory within the company.
Efficiency ratios
Inventory turnover
ratio Formula 2016
COGS/ Average inventory 3.80
COGS 108586
Average inventory 28571
Asset turnover ratio Formula 2016

Net sales/ Average total
asset 1.64
Net sales 189711
Average total asset 115719
Interpretation- efficiency ratios are the one which are used by the company in order to
analyse ability of company in employing its resources in such a manner that it help company in
taking decision for better working of company (Asset turnover ratio, 2021). the inventory
turnover ratio is the one which assist the company in analysing the number of time the goods are
sold over a period of time. For the company, inventory turnover ratio is 3.80. this ratio implies
that company is able to earn 3.80 times from the average inventory being sold by the business.
Furthermore, asset turnover ratio is one which assist company in analysing the fact that how
efficiently the company is able to generate sales from average total asset. This is basically a ratio
which help company in analysing the fact that total asset helps in generating good amount of
sales. The asset turnover ratio of company is 1.64 time and this implies that the company is able
to optimally use the total asset 1.64 times in order to increase the sales of company.
SECTION 4
Process that business might use to improve the financial performance
With the help of the above all calculation it is clear that the company is having a better
working ability and the profitability of the company is also average (Gallo and et.al., 2018).
Hence, for getting successful the most essential aspect is to manage the working and operations
in such a manner that they are ahead of all the competitors. For this some of the measures for
improving the financial performance of the company are as follows-
 The first and most essential aspect of improving the financial performance of the
company is to limit the indirect expenses. This is particularly necessary because of the
reason that when the indirect expenses will be managed in effective manner then this will
improve the net profit of the company. the reason pertaining to this fact is that when the
indirect expenses will be less than the amount deducted from the GP will be less and as a
result of this net profit of the company will increase (Ahmad and et.al., 2019).
 In addition to this, another recommended strategy is to work on effectively manage the
working capital. This is a recommended strategy as the working capital is the different
between the current asset and the current liabilities. This is pertaining to the fact that

when current asset will be more than the company will be able to manage its liabilities.
Hence, this will assist company in managing their working efficiency and try to meet all
the liabilities without selling of the fixed asset (Davids, 2017).
 Along with this it is advised to company that they must ensure that they effectively
manage the inventory system of the company. This is particularly because of the reason
that when the company will manage on time availability of the inventory then this will
assist company in producing the goods and services on time. Hence, there will not be any
delay within the production and making the product available to the company then this
will improve the cost of the company and this will result in effective management of
profitability.
 In addition to this, it is also recommended to the company that they must also effectively
manage their retained earnings. This is particularly because of the reason that when the
company will effectively manage their retained earning then this will assist company in
analysing and improving the position of company in case of some contingency
(Fedorková, 2018).
Hence, by complying with the above recommendation it will be helpful to the company that they
will improve the working and the profitability of the company to a great extent.
CONCLUSION
In the end, the above report concluded that the financial management is very important
for the company to manage its finance. The reason pertaining to the fact is that when the
financial management refers to as the managing all the financial aspect of the company in order
to manage the working and profitability of the company. The present report outlined the
importance of financial management like assistive in financial decision making, growth of
company. further it analysed the various financial statements like income statement, balance
sheet and cash flow statement. In the end the making of the financial statements like income
statement and balance sheet was made. In addition to this the ratio analysis was also undertaken
like profitability, efficiency and liquidity of the company. At last some recommendation was
provided like management of inventory, retained earnings and others was provided.

REFERENCES
Books and Journals
Ahmad, N.L., and et.al., 2019. The Importance of Financial Literacy towards Entrepreneurship
Intention among University Students. International Journal of Academic Research in
Business & Social Science, 9(9), pp.18-39.
Bapat, D., 2019. Exploring antecedents to financial management behavior for young
adults. Journal of Financial Counseling and Planning. 30(1). pp.44-55.
Baryła-Matejczuk, M., and et.al., 2020. Link between financial management behaviours and
quality of relationship and overall life satisfaction among married and cohabiting couples:
Insights from application of artificial neural networks. International journal of
environmental research and public health, 17(4), p.1190.
Davids, N., 2017. The importance of financial management knowledge and accounting skills
among department managers in the hotel industry within the Cape Town metropolis
(Doctoral dissertation, Cape Peninsula University of Technology).
Fedorková, K., 2018. Importance of Financial Aspects of a Company Crisis Management in
Slovakia. Marketing and Branding Research, 5(1), p.8.
Gallo, P., and et.al., 2018. Importance of financial and non-financial indicators in companies
with the balanced scorecard concept. Calitatea, 19(165), pp.34-38.
Holynskyy, Y., 2017. The importance of financial management principles in the State budget
execution. Annals of Spiru Haret University. Economic Series, 17(4), pp.19-28.
Vanauken, H. E., Ascigil, S. and Carraher, S., 2017. Turkish SMEs' use of financial statements
for decision making. The Journal of Entrepreneurial Finance (JEF). 19(1).
Online
Asset turnover ratio. 2021. [Online]. Available through:
<https://www.myaccountingcourse.com/financial-ratios/asset-turnover-ratio>

APPENDIX
Income statement for the year ended 31st December 2016
Details Amount
Turnover 189,711
Less cost of sales:
Material Cost 42,597
Production Cost 15,231
Labor Cost 50,758
108,586
Gross profit 81,125
Less Expenses:
Administrative expenses 13,751
Other operating overheads 22,374
Interest 1,943
Total Overheads 38068
Profit/(loss) for the financial year 43057