Importance of Financial Management

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