Financial Management: Concept, Financial Statement & Ratio Analysis

This report provides a comprehensive overview of financial management, emphasizing its importance in planning, coordinating, and controlling financial activities within an organization. It covers key concepts, including the allocation of resources, cost reduction, and employee motivation. The report reviews main financial statements such as the balance sheet, cash flow statement, and income statement, highlighting their role in assessing a company's financial health. It also explains the use of financial ratios—liquidity, profitability, and efficiency ratios—in evaluating a company's performance, with interpretations based on sample calculations. The report further discusses strategies for improving financial performance, including managing assets and liabilities, and concludes by underscoring the significance of financial management in ensuring a company's sustainability and growth in a competitive market. Desklib offers a wealth of resources, including similar solved assignments and past papers, to support students in their studies.

IMPORTANCE OF
FINANCIAL
MANAGEMENT

Table of Contents
INTRODUCTION.................................................................................................................................................. 3
MAIN BODY........................................................................................................................................................ 3
JUSTIFY AND EXPLAIN THE CONCEPT AND IMPORTANCE OF FINANCIAL MANAGEMENT................................................................3
EXPLAIN AND GIVE A REVIEW OF MAIN FINANCIAL STATEMENTS AND DESCRIBE USE OF RATIOS IN FINANCIAL MANAGEMENT.............4
(I) EXPLAIN THE DATA COLLECTED ON BUSINESS REVIEW TEMPLATE.......................................................................................5
(II) WITH THE HELP OF EXCEL PREPARE AN INCOME STATEMENT............................................................................................6
(III) PREPARE BALANCE SHEET USING EXCEL.......................................................................................................................6
(IV) EXPLAIN PROFITABILITY, LIQUIDITY AND EFFICIENCY OF THE ORGANISATION WITH THE HELP OF RESULTS CARRIED OUT THROUGH
RATIO ANALYSIS........................................................................................................................................................... 8
DEFINE AND EXPLAIN THE PROCESS THAT CAN BE ADAPTED BY BUSINESS FOR IMPROVING FINANCIAL PERFORMANCE......................12
CONCLUSION.................................................................................................................................................... 13
REFERENCES...................................................................................................................................................... 14
APPENDIX......................................................................................................................................................................15

INTRODUCTION
Financial management is considered an important aspect in every business the reason being
it helps in handling the finance related operations in a organisation in effective and efficient
manner. Financial management is required in a start-up and in already existing, well-established
business as well. Finance plays a significant role in every industry as it is useful for carrying out
the operations of the corporate. Financial management can be defined as a process of planning,
coordinating, directing and controlling the fund management related activities for attaining
proper utilization of resources in every firm. The report outlines about the significance of
financial management in commercial sectors and the use of financial reports in the enterprise.
Ratios are measured and calculated to determine the different prospects within a business
concern. The report also discusses about analysing and comparing the performance and financial
reports of the current accounting year with previous year (Al Ahbabi and Nobanee, 2019).
MAIN BODY
Justify and explain the concept and importance of financial management.
Financial management as the word indicates is a process of managing funds in a way that
would help every sector, industry and organisation to fulfil its desired and set goals (Bawole and
Adjei-Bamfo, 2020). It deals in operational related activities such as to planning alternatives,
choosing from best available, organise the plan in a specified manner, provide direction to
employees for achieving objectives well in time and monitor the results in a way that would help
to maximize profits & generate adequate revenues well in time. It helps in finding related
solutions that would help to implement actions in a determined manner and carry out expected
results. Financial management helps to forecast future too and predict success rate that business
would be able to achieve by choosing a certain project. Therefore, it gives a idea which project
would be suitable for an enterprise at a point of time. It can further be explained as a technique
that contributes in increasing profit margin and reduce unwanted risk rate, expenses and cost as
well. It guides managers to understand where to invest and which area contributes more towards
running of a company. It helps to plan innovative ideas that would help in growth and expansion
of a firm from small scale to a larger extent.
Importance of Financial management:

Locate scarce resources to best possible uses: It helps in allocation of resources and choosing
best alternative that would help to carry out such functions (Eppich and Grinda, 2019). It also
guides in planning funds as which area contributes on a larger scale as compared to others. It is
useful for turning things in best possible outcomes and provide best results. Management of
financial is helpful in long run when managing funds is a tough deal to tackle by large scale
organisations.
 Provides guidance for cutting down costs, expenses and maximizing profits:
Financial management provides ways and methods that would help in decreasing
unrelated expenses and minimize wastage as well. It contributes in increasing the
scale of profit earned and generated by a firm over a period and in a certain life
cycle.
 Motivate employees for working towards one common goal: It helps to provide
motivation to staff person associated in a enterprise and guide them to work for one
goal that is to generate more and more profits and eliminate risk that count as a
obstacle in smooth functioning of a organisation.
Explain and give a review of main financial statements and describe use of ratios in financial
management.
Financial statements can be explained as a proof that reflects that the business is sound and
is exactly working in the same manner as expected and shown in the environment. It helps
the related busines to fight and face competition in market. It is helpful for achieving goals
laid down and planned by managers for a certain function and the cash that would be needed
for carrying out related functions & operations. The records that help to predict current
financial performance and position of a firm are:
 Balance sheet: It elaborates information related to total asset that are acquired by a firm
and liabilities that the business is liable to pay and cover within a frame period
(Hartikayanti, Bramanti and Gunardi, 2018). Assets are bifurcated into sub headings such
as current and non-current assets such as machinery, plant. Liabilities whereas take in
account bill payable, long-term loans that are to be covered by business for maintaining
related financial position.
 Cash flow statement: It is a record that highlights the net fund flow of an
organisation. It is helpful for recoding cash inflows and outflows that takes place in

working of a company. Further it can be explained by dividing it in three related
types such as financial, investing and operating activities. Investing activities count
purchase and sale of non-current assets. Finance activities cover issue and redeem
debentures and shares and in case of operational functions it incorporates
adjustments related to working capital (Hashim and Piatti, 2018).
 Income statement: It is a useful statement that helps in finding out earning of a
corporation. It includes expenses that are involved in sale of commodities and all
operating related costs over a financial year. Net profit can be calculated with the
help of profit and loss account.
Importance of ratios in financial management:
Accounting ratios/ Financial ratios are helpful in developing related comparisons and
evaluate related changes observed among two enterprises. Impact of ratios is explained as
under:
 Helps in making plans and predicting future situations: Ratios are a tool that
contributes in developing strategies that would assess in formulating policies. It
helps to forecast related results that would be served by an organisation over a
period of time. It also supports to plan in advance what can be done to improve
current performance of the related business.
 Assess in determining profit range: Return on equity is a ratio that helps to
understand the scale of profitability that could be earned and increased over a
duration. It helps enterprise to have a view as what amount of money that is invested
by a investor is being used by a company (Lewis, 2018).
 Evaluate finance related risks prevailing around the firm: There are some ratios that
help to find out to what extent risk is present in external environment. It takes place
when excess of borrowing takes place in a enterprise.
(i) Explain the data collected on Business review template.
Company’s key financial and related performance indicators as under:

(ii) With the help of excel prepare an income statement.
In appendix

(iii) Prepare balance sheet using excel.

(iv) Explain profitability, liquidity and efficiency of the organisation with the help of results
carried out through ratio analysis.
 Liquidity ratios: It can be defined as ability of a organisation to cover its debt and
acquire more assets that would help to generate revenues on a larger scale. Such
ratio comprises of calculation of stock, current liabilities and current asset. It is
useful in ascertaining solvency of a company as well. Necessary ratios involved are
quick and current ratio (Lu, Shon and Zhang, 2020).
Current Ratio Quick Ratio
0
0.5
1
1.5
2
2.5
Column 1

Interpretation: The calculation of ratios so far helps businesses to interpret liquidity of a
firm. Ideal ratio decided in such cases is 2:1 and quick ratio taken into consideration is 1:1.
It can thus be witnessed that current assets in relation with liability is 2.22 that gives an idea
that the business is maintaining its solvency. After elimination of stock from current asset
quick ratio modified as 1:47 that clearly states that company holds the capability to cover its
debts and liabilities well in time.
Profitability ratios: It is helpful to evaluate abilities of enterprise for earning more revenues
with comparison to its expenses. It reflects the financial performance of a firm in market and
its competitive image developed so far in environment that would be competent enough
towards other organisations. Some essential profitable ratios are return on equity, gross
profit margin and return on assets as well (Martin, Keown and Titman, 2020).
Year 2015 Year 2016
0
5
10
15
20
25
30
35
40
45
50
Gross profit
Net profit

Interpretation: From the above performed calculation it can be predicted that where the
company has reached in earning and saving required funds. It represents percentage of profit
in association with expenses such as operating and non-operating as well. Gross profit can
be defined as portion that is left after revenue earned and net profit margin explains
percentage of income earned after deducting costs. Gross profit recorded as 42.76% and net
profit so far is 22.7, that clearly states that profit percentage has declined by approx 20%.
Thus, it is important for companies to shrink the unwanted costs such as overhead that
serves as a hurdle in functioning of business. It is mandatory for investors to have a
comparison of performance served by related firm in market against competitor’s present in
environment. It would help them to evaluate financial performance and positioning in
market.
Efficiency ratios: It provides an indication as in what manner cash earned is being managed
by the enterprise, its liabilities and assets as well. It helps to understand the working of a
organisation and the time consumed by linked employees in collection of payments from
clients and time taken by the business for covering debts and proceed in calculation of
equity and asset turnover. The ratios are useful in operations such as receivable turnover,
account payable turnover and asset turnover ratios.

Interpretation: Clients on an average are recorded to take 51 days approx for covering debts
whereas in case of creditors they take 52 days for collection of payments. Thus it can be
interpreted that the business would be covering debts, paying them in one time frame. The
inventory turnover observed us 3.8 that indicates that the investment in flow of stock is 4
times i.e., quarterly. The total asset that is reflected in records prepared is 1.23 that clearly
states that the enterprise is doing well and generating enough cash at the end financial year
that helps in sustainability and development of company in competitive market.
Debtors Turnover Ratio Creditors turnover ratio
0
10
20
30
40
50
60
70
No. of days

Define and explain the process that can be adapted by business for improving financial
performance.
Financial performance: It can be explained as a tool that helps a organisation in earning
and generating enough revenues with the assistance of assets. It also provides a overview of
finance related health and growth of company in market for a given period of time that
would help managers and other related people predict whether the company’s working is
enough sound or not. It also gives an effective an efficient idea whether it would prove to be
profitable and favourable or not (Piatti-Fünfkirchen and Schneider, 2018).
Financial performance can be explained with the help of certain areas such as liquidity, size and
ownership. Some necessary calculations are performed as under that would help supervisors and
managers in decision making process:
The current asset in relation with current liabilities are recorded diminishing by 82% when
compared with previous year, that clearly states that outflow of fund was more and liquidity
of firm is declining (Pinckney, Cohen and Leonard, 2019).
 Customer satisfaction has improved that is providing support in growth and expansion of
firm. It has also contributed in maintaining sustainability of employees in company.
 Increase in net profit is recorded by 126.77%, the reason behind is costs relating to non-
operating areas such as interest has declined.
Suggestions that might help if implemented:
 Effective marketing policies: IT would help to improve the running of company and
reduce the expenses with the help of proper utilisation of scarce resources that would also
contribute in increasing profits. It can be done by planning innovative techniques
competent to others present in market.
 Rise in inventory turnover and decline in inventory would prove to be a tool that would
reach fulfilment of working requirements.

CONCLUSION
It can be concluded from above prepared report that financial management plays an
integral role in business and thus it is necessary to have full and related knowledge related to
finance terms. It assists firms in efficient allocation of resources that would help in decision
making and developing useful strategies and plans. Ratios calculated above helps to predict
solvency and liquidity of a enterprise for a given period of time. It also helps to enhance
growth and expansion that would contribute in development of company as well.

REFERENCES
Books and Journals
Al Ahbabi, A.R. and Nobanee, H., 2019. Conceptual building of sustainable financial
management & sustainable financial growth. Available at SSRN 3472313.
Bawole, J.N. and Adjei-Bamfo, P., 2020. Public procurement and public financial management
in Africa: Dynamics and influences. Public Organization Review, 20(2). pp.301-318.
Eppich, R. and Grinda, J.L.G., 2019. Sustainable financial management of tangible cultural
heritage sites. Journal of Cultural Heritage Management and Sustainable Development.
Hartikayanti, H.N., Bramanti, F.L. and Gunardi, A., 2018. Financial management information
system: an empirical evidence.
Hashim, A. and Piatti, M., 2018. Lessons from reforming financial management information
systems: a review of the evidence. World Bank Policy Research Working Paper, (8312).
Lewis, C.W., 2018. The field of public budgeting and financial management, 1789–2004.
In Handbook of Public Administration (pp. 151-225). Routledge.
Lu, J., Shon, J. and Zhang, P., 2020. Understanding the dissolution of nonprofit organizations: A
financial management perspective. Nonprofit and Voluntary Sector Quarterly. 49(1).
pp.29-52.
Martin, J.D., Keown, A.J. and Titman, S., 2020. Financial management: principles and
applications. Prentice Hall.
Piatti-Fünfkirchen, M. and Schneider, P., 2018. From stumbling block to enabler: the role of
public financial management in health service delivery in Tanzania and Zambia. Health
Systems & Reform. 4(4). pp.336-345.
Pinckney, T.C., Cohen, J.M. and Leonard, D.K., 2019. Kenya’s introduction of microcomputers
to improve budgeting and financial management in the Ministry of Agriculture.
In Microcomputers in Public Policy (pp. 67-93). Routledge.

APPENDIX

It can thus be interpreted from above report that financial important plays an important
role in developing plans and controlling cash flow in a company. It helps in analysing
performance and stability of a organisation for a certain period.