Importance of Financial Management

This article discusses the importance of financial management in organizations. It covers the concept and relevance of financial management, different types of financial statements, and the use of ratios in financial management. It also explores how financial management helps in decision making, cost control, and forecasting profit.

IMPORTANCE OF
FINANCIAL MANAGEMENT

Table of Contents
INTRODUCTION ..........................................................................................................................3
SECTION 1......................................................................................................................................3
Concept and relevance of financial management. ......................................................................3
SECTION 2......................................................................................................................................4
Brief explanation regarding different types of financial statement & use of ratio in financial
management. ...............................................................................................................................4
SECTION 3......................................................................................................................................7
Formulation of income statement................................................................................................7
Clarification Formulation of balance sheet..................................................................................8
Calculation of ratios. ...................................................................................................................9
SECTION 4....................................................................................................................................11
Process business organization use to improve their financial performance. ............................11
CONCLUSION .............................................................................................................................12
REFERENCES..............................................................................................................................13

INTRODUCTION
The term financial management is related with managing monetary resource of
organization by implementing effective planning sand controlling strategy related with capital of
finance. This report is formulated to define relevance of financial management by defining use of
tools and technique this approach as well as importance of ratio analysis and use of financial
statement. It is also includes process or strategies use by management department to enhance
financial performance of their business organization.
SECTION 1
Concept and relevance of financial management.
Financial management: The term financial management is combination of 2 words, first is
finance and other is management. Finance is consider as blood of business organization and it
provide money to fulfill requirement of running business activities. On the other side,
management is the process of properly plan, organize, coordinate and control resource of finance
for successfully run operations of business. In other words, financial management is the
procedure of managing financial resource in such a manner which help in increase profitability
rate and performance of business organization. It is consider as an application of planning &
controlling essential function of finance. Following are the importance of this application within
the organization:
 Financial planning: Manager use financial management approach for the purpose of
formulate strategies and plan on the basis of analysing market condition. For this purpose
relevant business data is collected which useful in prepare future business policies in
order to attain m long term goal of ABC Limited (Barclay, Fu and Smith, 2020).
 Determination of capital structure: Success of the organization depend on how
effective manager take decision regarding formulation of capital structure. As it is
combination of equity, debt, bond securities thus which manager need to invest in
resource help in maintain monetary cycle of cash flow activities within the business.
Manager of ABC Limited use tools of financial management which includes capital
budgeting on the basis of that they decide to format their capital structure in effective
manner.

 Allocation of funds: Financial management useful in allocation of necessary funds of
organization. Manager on the basis of finding requirement of each department allocate
money to department, this will help in reduce issue arises related with internal coherence
between different departments.
 Monitoring financial activities: By using various tools of financial management,
manager able to measure and monitor each activity related with finance. On the basis of
that level of cash inflow is maintain.
 Facilitate cost control: Financial management tools help in measuring cost require to
run any business activity and on the basis of that financial manager formulate policies &
strategies which help in finding out those investment activities which become reason of
generating high rate of cash outflow and incurred high rate of cost. With using effective
tool manager able to control cost activities (Brzozowski, and Visano, 2020).
 Forecasting profit: Manager by formulating budget and analysing financial statement
able to predict regarding future rate of cash inflow as well as on the basis of that they
forecast value of profit, which organization may be able to generate in future time
period. On the basis of analysing amount of profit manager mitigate or control risk arise
during the time of execution of project activities.
 Help in decision making process: Business organization run their operation on the
basis of decision they take regarding specific projects. Financial management techniques
are useful in order to take decision regarding with investment, financial, as these are
consider as relevant business decision and success of any project depend on the decision
which manager take regarding with running business activities.
SECTION 2
Brief explanation regarding different types of financial statement & use of ratio in financial
management.
Financial statement are consider as combination of different types of documents which are used
to formulate for the purpose of presenting all the relevant business data in effective manner.
Financial statement includes, balance sheet, income statement and cash flow statement . On the

basis of formulation of theses statement manager able to represent their statement of financial
position in front of internal as well as external shareholders. Theses statement are define below:
Income statement: The term income statement refer as document which represent revenue or
expenditure incurred for given time period. It is also known as earning report or profit and loss
statement. With the modification in norms of GAAP, now trading statement is also covered and
part of income statement.
This statement help in determine cost require to formation of a product and on the basis
of that expenses incurred on selling and advertisement of the product and income generate from
selling of goods and service and through other sources of income all these information are
define in this project in systematic manner. Profit and loss statement help in find out changes
value of profit as compare with previous year income statement and on the basis of formulation
of this statement manager able to understand and compare their performance of generating net
profit with rival organizations.
Balance sheet: It is a statement which showcase value of assets as well as liabilities.
Assets side are includes all those items which help in generate cash inflow activities and they are
the symbol of growth of organization, on the other side all liabilities includes item which
generate obligation to the organization Assets as well as liabilities also dividend into 2
categories which includes current assets and current liabilities as well as long term assets along
term liabilities (Hulikal Muralidhar, Bossen. Mehra, and O'Neill, 2018).
Assets: Items which contain economic value and help in alternate future profit are
consider assets.
Short term assets: Theses includes those assets which can be convertible, or sold or
liquidated within 1 year of time period. These help in determine liquidity position of
organization and includes, trade receivables, cash and cash related equipments, stock, pre-paid
expenses etc.
Fixed assets: Theses includes assets which value is not change with change of time
period and these are not easily convertible in cash. Fixed assets are help in generate long term
benefits. Theses includes, machine, building, long term investment etc.
Liabilities: Theses includes items which generate obligation on organization. These are
legal responsibilities and sacrifice of economic benefit. There are two types of liabilities :

Short term liability: obligations which payment organization need to pay within one
year are known as short term business liabilities. Theses are items which become the reason of
generate problems in between cash inflow. And reason of incurring high rate of cash outflow.
Trade payable, short term borrowing etc.
Long term liability: Items or liabilities which are due more then of over 1 year. It also
includes part of equity, reserve, long term loan and securities bond. Generally equity is part of
liabilities however their block is separate from current as well as long term debt liabilities.
Cash flow statement: Report which is formulated for the purpose of showcase inflow
and outflow related with cash in specific time period. This statement is formulated by applying
direct as well as indirect method. Which are define below:
Operating activity: Activity which define how organization generate money from their
running business operations and selling business products of organization. Operating activity
help in determine how effective and efficiency manager able to maintain their cash flow
activities by selling their business products (Khan, Zaman, Usman,Nassani, Aldakhil and Abro,
2019).
Investment activity: This activity help in find out how effectively manager generate
cash from their investment portfolio and requirement of cash outflow of these activities.
Financial activity: By formulation of statement of cash flow this activity help in
determine relevance of financial activities to generate cash inflow from earn interest, and outflow
which is related with distribution of dividend activities.
This statement help in recognize how effective manager able to maintain their cash position
within organization.
Use of ratio in financial management approach:
Decision making:With the help of calculating different types of ratio organization able to
take decision regarding which alternative is best and generate more profit. On the basis of
calculating gearing ratio and debt equity ratio manager find out rate of generating interest and
pay debt liability which help in formulate policies.
Find out efficiency: Manager on the basis of calculating value of current as well as
quick ratio able to find out rate of liquidity On the basis of that they are able to evaluate ability of

organization to pay their relevant short term liability by using their liquidity assets and cash
availability within the organization.
Future forecasting: Ratio is part of financial management technique, on the basis of
defining value of different ratio which includes, profit and loss and balance sheet ratio, manager
able to forecast regarding their future rate of gearing. On the basis of ratio analysis they are able
to compare their organization's performance with previous year and this will help in prove bas
regarding formulation of budget and predict future rate of earrings (Marqués, García and
Sánchez, J 2020).
SECTION 3
Formulation of income statement.
2016
Turnover 3 189711
Less cost of sales:
Material Cost 108586
Production Cost 15231
Labour Cost 50,758
108586
Gross profit 81125
Less Expenses:
Administrative
expenses
13751

2016
Other operating
overheads
22374
Interest 1943
Total Overheads 4 38068
Profit/(loss) for the
financial year
43060
Clarification Formulation of balance sheet.
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

Non Current assets
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
1,15,719
Non Current Liabilities
Bank loans and overdrafts 16,506
Other Liabilities 7,304
23,810
Current ratio = 84349/37928
= 2.22
Quick ratio = 55778 / 37928
=Clarification 1.47
Quick ratio = Quick assets /
Current liabilities, here value
of quick assets = Current
assets - Stock = 85349 –
28571 = 55778
8,094
Net assets 83,815

Non Current assets
Capital and reserves
Called up share capital 39,436
Reserves 1322
Retained earnings 43,044
Total equity 83,815
Calculation of ratios.
Particular 2015 2016
Gross profit 42.76 42.8
Net profit 10.57 22.7
Current ratio - 2.22
Quick ratio - 1.47
Profitability ratio: Theses are consider as those ratio which are used in order to find out
ability of business organization to generate profit by selling their goods and services. These
includes all those items which is directly connected with generating of sales. On the basis of that
manager able to determine ability of their organization to maintain position in market by taking
competitive advantage of high rate of selling rate.
In this case , value of gross profit of organization in 2015 was 42.76 % and in 2016 it was
increase however their will be miner difference arise but this showcase that organization able to
sell more produce as compare with previous year.
Net profit: This ratio useful in determine relation between sales and net profit. On the
basis of that manager recognize how effective they use strategies to generate profit after
deducting all the relevant business expense. Value of net profit ratio has been highly increase as
compare with 2015, which interpret that management department use effective marketing
policies in order to increase high rate of cash inflow by increases their sale rate.

Efficiency ratio: This ratio help in determine efficiency level of organization. On the
basis of that manager able to find out how effective department work in order to achieve goals.
This ratio includes, stock turn over , debtor turn over ratio. On the basis of calculating value of
these ratio ability of paying debt liability and collection of funds from debtors can be define in
systematic manner. High time of payable ratio showcase that organization require more time in
order to collect their funds and on the other side short time period of payment of funds showcase
that organization use effective creditor management policy thus on the basis of that they easily
collect money from their debtor and pay short term liability to creditors.
Liquidity ratio: This ratio is useful in order to find out liquidity rate of organization on
the basis of that manager able to determine liquidity portion of business organization to pay their
short term debt liability. For this purpose current as well as quick ratio is calculated on the basis
of that manager able to find out how much cash and related assets organization have to easily pay
their short term business liability (Vasvári, 2020.).
Current ratio: This ratio is calculated for the purpose of determine relation between
current assets as well as with current liabilities. On the basis of that manager able to evaluate
whether they have ability to maintain ideal current ratio or not. In this case value of current ratio
has been change from 3.44 to 2.22 which means that in 2016 organization maintain their current
assets ineffective manner even though their vale of asst has been decile but it will help in
managing these assets for relevant purpose of business.
Quick ratio: This ratio is part of liquidity ratio which help in finding out time availability
of assets for the purpose of paying and fulfil debt liability by using only cash and cash relevant
assets. Value of quick assets is determine by deducing stock value from theses assets. Value of
quick ratio as determine at 1.47 which is more then ideal ratio however thus mean that
organization have access of cash assets to pay their short term debt ability by using cash capital
of organization.
Shareholder's equity: This ratio useful in determine relation between debt and equity,
on the basis of that ratio and level of of these item in organization can be determine. This ratio
useful in interpret ratio of capital structure in debt as compare with equities. Value of
shareholders equity has been changes from 63,057 to 83815 which means that management
department use effective strategies in order to increase their share capital which is
showcase symbol of of growth of organization as compare with previous year.

SECTION 4
Process business organization use to improve their financial performance.
There are various strategies which manager use in order to enhance financial performance
of organization. Management department on the basis of analysing marketing condition able to
formulate those strategies through which they enhance perforce of organization, some of these
are define below:
Marketing strategies: Manger on the basis of formulating effective marketing strategies
able to attract their target market customers, which help in enhance brand image of business
organization as well as increase sales rate which directly impact on the cash inflow activities.
This'll useful in increase rate of profitability and which beneficial in order to proved growth of
business organization (Young, and Legister, 2018).
Manager on the basis of analysing and evaluating performance of organization able to
generate policies and strategies which useful in enhance rate of profitability of business
organization.
Other strategies: Other then marketing strategies in which by increasing sales rate
manager able to increase their financial performance, organization by minimizing their cost and
cut throat additional expenditure incurred activities able maintain their level of financial
performance and build strong structure of financial capital which is the symbol of growth of
organization.
By using different types of inventory management technique , cost statement , through
applying standard costing method and relevant to of measurement of financial
performance, ,management department of organization able to control or mitigate extra cost
which useful in proved strong base for run future business activities, thus will help in maintain
cash inflow of organization and improve in the performance of organization.
CONCLUSION
From the above analysis it has been concluded that financial management play vital role
ih managing position of organization. As with the use of different technique and tools of
financial management organization able to manage their capital. Manager use this approach for
take relevant or essential business decision as well as understand changes of future business

profitability rate and compare their performance with rival business organization. They by
formulating financial statement able to interpret performance of organization to their internal
swell as external users and by formulating effective marketing strategies and cost control
technique manager able to enhance financial performance of organization.

REFERENCES
From books and journals
Barclay, M. J., Fu, F. and Smith, C. W., 2020. Seasoned equity offerings and corporate financial
management. Journal of Corporate Finance. p.101700.
Brzozowski, M. and Visano, B. S., 2020. “Havin’Money’s Not Everything, Not Havin’It Is”: The
Importance of Financial Satisfaction for Life Satisfaction in Financially Stressed
Households. Journal of Happiness Studies, 21(2), pp.573-591.
Hulikal Muralidhar, S., Bossen, C., Mehra, A. and O'Neill, J., 2018. Digitizing monetary
ecologies: Intended and unintended consequences of introducing a financial
management app in a low-resource setting. Proceedings of the ACM on Human-
Computer Interaction. 2(CSCW). pp.1-17.
Khan, H. U. R., Zaman, K., Usman, B., Nassani, A. A., Aldakhil, A. M. and Abro, M. M .Q.,
2019. Financial management of natural resource market: Long-run and inter-temporal
(forecast) relationship. Resources Policy.63. p.101452.
Marak, Z. R. and Pillai, D., 2018. Factors, outcome, and the solutions of supply chain finance:
Review and the future directions. Journal of Risk and Financial Management. 12(1).
pp.1-23.
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.
Vasvári, T., 2020. Hardening the budget constraint: Institutional reform in the financial
management of Hungarian local governments. Acta Oeconomica. 70(4). pp.571-592.
Young, J. H. and Legister, A. P., 2018. Project-based learning in international financial
management. Journal of Teaching in International Business .29(1). pp.76-87.

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