Concept and Importance of Financial Management in Applied Business Finance

This document discusses the concept and importance of financial management in applied business finance. It covers the main financial statements and their use of ratios. It also provides insights on ways to improve the financial performance of a company.

APPLIED BUSINESS
FINANCE

TABLE OF CONTENTS
MAIN BODY..........................................................................................................................................4
SECTION 1.................................................................................................................................................4
Defining and discussing the concept and importance of financial management......................................4
SECTION 2.................................................................................................................................................5
Discussing the main financial statement and use of ratios.......................................................................5
SECTION 3.................................................................................................................................................6
i. Completing the information on business review template...............................................................6
ii. Showing income statement as per the given template......................................................................7
iii. Showing Balance sheet as per the requirement............................................................................7
iv. Describing the profitability, liquidity and efficiency ratio as per the case study..........................9
SECTION 4...............................................................................................................................................12
Describing the ways which can improve the financial performance of company..................................12
CONCLUSION.........................................................................................................................................13
REFERENCES..........................................................................................................................................14
APPENDIX...............................................................................................................................................15

INTRODUCTION
Financial management is systematic procedure that comprises evaluation, summarization
and monitory related data for smooth functioning of organization. Modern scenario of
organization requires an unique characteristic to obtain differentiation as compared to other
similar firms in industry. The current report will include the concept as well importance of
Financial Management (FM). Present case study will include the explanation of main financial
statements along with calculations through given business template. It will comprise the methods
to improve financial performance.
MAIN BODY
SECTION 1
Defining and discussing the concept and importance of financial management
Financial management is huge concept that provides significant contribution in
development of organization. FM is used by all types of business regardless of scale small,
medium and large due to its essential characteristics. In addition to this, it provides various
benefits to company which are mentioned below
Financial planning is foremost significant part of Fm as it helps in determining the future
needs and taking corrective actions to meet such requirements (Shapiro, and Hanouna, 2019). It
aids in reducing the burden of urgency by forecasting the sources of funds at starting point only.
This is crucial part of life cycle of business which help firm to derive success as it is largely
dependent on financial planning of a company.
Identification of investment opportunity becomes possible by implementing this FM .
With respect to this, it aids organization to get financial decision making skills that impact
positive in making progress (Yuniningsih, Pertiwi and Purwanto, 2019). Economic growth and
stability by wealth creation will give improving standard of living opportunity.
Capital reserve through appropriate tax planning and valuation of company becomes
possible with executing this course of action. Safeguarding and protecting the funds as well can
be exerted through giving proper consideration to FM.

SECTION 2
Discussing the main financial statement and use of ratios
Every organization formulates some types of statements for making accurate recording of
financial transactions. These statements are important for making structural planning and
evaluating suitable strategy that can enhance growth of firm. Main financial statements include
cash flow, income, equity shareholders and balance sheet.
 Balance sheet is one of the crucial type of financial statement which is formulated by
segregating into two parts such as assets and liabilities. This is basically prepared at the
end of selected financial period for making evaluation of current position in terms of
monetary resources (The basic four financial statement. 2021.). Cash Flow statement is
another type of statement which is prepared by company for making assessment of cash
in and out flows. It is concerned with determination of investing, financing and
operational practices which results in out and inflow of cash resources.
 Income statement is widely given focus by all types of industries and scales for
evaluating earnings and expenditure. This helps in identifying that company is earning
profits or making losses so that suitable course of action can be taken. Shareholder’s
equity shows contribution of investors in capital planning and earning profits, etc.
Ratios Utilization
It is utilized by different parties for varying purposes so that suitable actions can be executed.
Basic uses of ratios are shown below:
 There are various types of ratios that has its unique identity as fulfils the specific need of
user. The one of the important use of ratio is related with its ability to make
communication more effective by creating this as integral part of business. It can play
vital role in informing what has happened from one period to another (Bitar,
Pukthuanthong and Walker, 2018).
 Investment decisions can be effectively taken by getting deeper insights into each
influencing factor. Solvency and profitability all decisions can be evaluated and taken
through analyzing respective ratios.

 Comparison of performance can be exerted by user through giving emphasis on financial
ratios. In addition to this, it can be done by making critical analysis between two selected
periods for making comparison. Better performance determination can be done so that
suitable actions for improvement of business strategy can be identified.
 Helps in understanding the profitability of company by analyzing the operational
efficiency can help user to know liquidity position (Chauhan, Singh, and Sachdeva,
2021). Moreover, ratios play role in fulfilling these objectives of users in most
advantageous pattern.
 Business risk can be determined by using ratios in systematic manner.
SECTION 3
i. Completing the information on business review template
The Company’s key financial and other performance indicators during the year were as
follows:
2016
£’000
2015
£’000
Change
%
Profit for the financial year 43057 18,987 226.7
Shareholder’s equity 83802.
7
63,057 +32.9
%
Customer satisfaction 4.5 4.1 +10
Average number of employees 649 618 +5
%
Gross Profit = Sales - COGS
2016 = 189,711 -108,586

=£ 81125
2015= 179,587- 98,975
= £80612
Net Profit = Sales- COGS- administration – operating expenses- interest
2016 = 189,711 -108,586 - 13,751 - 22,374 – 1943
= 43057
2015 = 179,587- 98,975 - 20,251- 34293 – 7081
= 18,987
Net Profit increased in 2016 by 226.7% during the year.
Shareholders’ equity increased by 32.9% by £83802.7.
ii. Showing income statement as per the given template
From the calculation shown in appendix regarding the income statement it can be analyzed that
company has good amount of turnover which is more than the previous year. The computed
gross profit for the year 2016 is 42.8% which is greater than ideal GP of any industry. This is
representing good profitability structure of organization (Brigham, and Houston, 2021). Having
good gross profit ensures that company’s ability to generate profit from sales has increased. Net
profit for the mentioned financial year is 22.7%. the related calculated ahs been done as per the
case study and excel sheet requirements which ahs been shown in appendix.
iii. Showing Balance sheet as per the requirement
Balance sheet as at 31 December 2016
2016
Total
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
Working note:
Total Assets
153,64
7
Less: Total Liabilities 69,832
Total equity 83,815
By analyzing the above mentioned balance sheet as per the requirement it can be
analyzed that there are various reasons for which it has been prepared. It provides summarized
detail of monetary position of the specified organization.
iv. Describing the profitability, liquidity and efficiency ratio as per the case study
Ratios are computed for accomplishing the business objectives of analyzing the prevailing
lacking areas and related improvements.
Profitability Ratio
Gross profit Ratio

Particulars Formula 2015 2016
Gross profit 80612 81125
Sales 179,587 189,711
Gross profit Ratio Gross profit/
sales*100
44.88 42.76
From the analysis of above computed information it can be analyzed that company’s
GPR is in decreasing trend but higher than the ideal ratio so it indicate positive sign.
Net Profit ratio
Particulars Formula 2015 2016
Net Profit 18,987 43057
Sales 179,587 189,711
Net Profit ratio Net Profit/ sales*100 10.57 22.69
NPR of the company is representing the favorable outcome which can be validate by
above shown calculations. Stakeholders will highly get attracted.
Operating profit ratio
Particulars Formula 2015 2016
Operating profit 42544 19500
Sales 179,587 189,711
Operating profit
ratio
Operating profit/
sales*100
23.68 10.27
Operating profit for mentioned company is presenting downward movement so company
requires improvement as per the illustrated table
Liquidity Ratios
Current ratio

Particulars Formula 2016
Current assets 84,349
Current liability 37,928
Current ratio Current assets/
Current liability
2.22
From the available information it has calculated current ratio for 2016 is greater than the
ideal ratio and it is positive indication.
Quick Ratio
Particulars Formula 2016
Quick assets 55778
Current liability 37,928
Current ratio Quick assets/ Current
liability
1.47
It is also showing good liquidity to meet short term obligation of organization.
Efficiency Ratio
Inventory turnover ratio
Particulars Formula 2016
Stock 28,571
COGS 98,975
Inventory turnover
ratio
Stock/ COGS 0.28
Company’s this ratio should be high to obtain the greater revenue by replacing stock of
inputs as well output.
Assets Turnover Ratio
Particulars Formula 2016

Revenue 189,711
Total assets 153647
Assets Turnover
Ratio
Revenue/ Total assets 1.23
It represents the efficiency of organization in order to use assets for generating revenue.
From the above mentioned figure it can be assessed that it is making optimize utilization of
available resources (Tian and Yu, 2017).
Debtors’ turnover ratio
Particulars Formula 2016
Trade Debtors 26,367
Sales 189,711
Debtors turnover
ratio
Trade Debtors/ Sales*365 50.72
It is related with credit collection efficiency of organization. It should also be low from
the mentioned period and requires improvement in fund collection from debtors.
SECTION 4
Describing the ways which can improve the financial performance of company
From the analysis of given case study it can be analyzed that there are several areas of
company which requires the improvements for increasing the financial performance. The best
method for making evaluation in company’s current performance is giving emphasis on financial
statements. By making an evaluation it has been derived that firm should pay attention on
reducing the expenses like labor, material cost, etc. for reducing the expenses of organization. In
addition to this, expenses can be declined by making budgetary plan for identifying essential
parts of organization (Kembauw and et.al., 2020). It play role in making road map for business
so that proper allocation of financial resources can be exerted which will tend to remove
irrelevant expenditures. Profit margins can also be increased by having appropriate budgetary
control technique in enterprise.

The lacking areas of balance sheet and income statement of company can as well be
determined by having appropriate ratio analysis. From the calculated ratio metric for liquidity,
profitability and efficiency firm can recognize that how much it is improving as compared to
previous. The trend line of growth of specified organization is quite good but making qualitative
improvement by adopting inventory & risk management (Mousa Nejad and et.al., 2020). In
addition to this, it will provide assistance in meeting market forces in competitive manner. This
can decline the cost of production and distribution channel and enhance possibility of increasing
profits (Ichsani, Andrian and Pirmansyah, 2021). From the case it can be interpreted that its
debtor collection period requires change which can be executed by making modifications in
prevailing credit policies. It can comprise sending reminders to all customers for avoiding
situation of bad debts.
Paying short as well long term liability on time play crucial role in increasing the
trustworthiness among the stakeholders. creditworthiness increment provide opportunity to have
sustainable as well developed business environment. Diversifying sources of finances increases
efficiency of conducting operating activity and reduces risk of losing market opportunity for
growth. Implementing suitable strategies along with adhering with legal obligation so that
unnecessary bad impact can be avoided (Atmadja, and Saputra, 2018). Making time to time
assessment of prevailing strategies solve half of the issues existing in company. Modification in
current business structure to cope up with changing requirements of organization can lead
business towards sustainable development and growth.
CONCLUSION
From the above report it can be concluded that financial management is crucial for
cooperating with changing requirements of business. In addition to this, the current report ahs
included importance of FM and main financial statements along with uses of ratios. Current case
study has given emphasis on calculation of missing parts in business review template to meet the
requirement of report. Present report comprises income statement, balance sheet and ratio
computation from the available information. The process for making improvements in order to
enhance financial position has been mentioned in current case study.

REFERENCES
Books and Journals
Atmadja, A.T. and Saputra, K. A. K., 2018. Determinant factors influencing the accountability of
village financial management. Academy of Strategic Management Journal.
17(1). pp.1-9.
Bitar, M., Pukthuanthong, K. and Walker, T., 2018. The effect of capital ratios on the risk,
efficiency and profitability of banks: Evidence from OECD
countries. Journal of international financial Markets, Institutions and
Money. 53. pp.227-262.
Brigham, E. F. and Houston, J. F., 2021. Fundamentals of financial management. Cengage
Learning.
Chauhan, H., Singh, A. K. and Sachdeva, S., 2021. Business model and financial performance of
food SMEs: mediation by competitive advantage. International Journal of
Business and Globalisation. 27(1). pp.113-131.
Ichsani, S., Andrian, D. and Pirmansyah, D., 2021. The Influence of Financial Ratios on Firm
Value. Psychology and Education Journal. 58(3). pp.346-355.
Kembauw, E. and et.al., 2020. Strategies of Financial Management Quality Control in
Business. TEST Engineering & Management. 82. pp.16256-16266.
Mousa Nejad, S. and et.al., 2020. Strategic Human Capital Policy Making and its Relationship
with Financial Performance Improvement in Tehran Stock
Exchange. Political and International Researches Quarterly. 11(42).
pp.383-402.
Shapiro, A. C. and Hanouna, P., 2019. Multinational financial management. John Wiley & Sons.
Tian, S. and Yu, Y., 2017. Financial ratios and bankruptcy predictions: An international
evidence. International Review of Economics & Finance. 51. pp.510-526.
Yuniningsih, Y., Pertiwi, T. and Purwanto, E., 2019. Fundamental factor of financial
management in determining company values. Management Science
Letters. 9(2). pp.205-216.
Online

The basic four financial statement. 2021. [Online]. Available through: <
https://www.accountingtools.com/articles/the-four-basic-financial-
statements.html>

APPENDIX
Income statement for the year ended 31st December 2016
2016
Turnover 3 189,711
Less cost of sales:
Material Cost 42,597
Production Cost 15,231
Labor Cost 50,758
Gross profit 81,125 GP %
= 42.8
Less Expenses:
Administrative expenses 13,751
Other operating overheads 22,374
Interest 1,943
Total Overheads 4 38068
Profit/(loss) for the financial year 43057
NP
%= 22.7