Financial Management: Importance, Statements, and Performance Analysis

This report delves into the critical aspects of financial management within a business context. It begins by highlighting the importance of financial management in controlling funding and finance-related processes, emphasizing its role in planning, organization, and decision-making. The report then explores financial statements, including income statements, balance sheets, and cash flow statements, and explains how they are used to assess an organization's financial health. Furthermore, it provides an in-depth explanation of financial ratios such as net profit ratio, gross profit margin, current ratio, and quick ratio, demonstrating their application in evaluating profitability and liquidity. The report concludes by discussing processes to improve financial performance, such as cost-cutting measures and debt management, underscoring the significance of these strategies for business success.

Importance of Financial
Management
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Table of Contents
Introduction................................................................................................................................2
Section 01..................................................................................................................................2
Importance of Financial Management....................................................................................2
Section 02..................................................................................................................................4
Financial Statements and Ratios.............................................................................................4
Section 03..................................................................................................................................5
Explanation of the Use of Ratios in Financial Management..................................................5
Business Review Template.....................................................................................................8
Section 04..................................................................................................................................9
Processes to Improve Financial Performance.........................................................................9
Conclusion................................................................................................................................10
Reference..................................................................................................................................10
Appendix..................................................................................................................................11

Introduction
Businesses use money and credit to achieve their goals and objectives, which is known as
business finance or business financing. The ability of a firm to supply goods and services to
customers is dependent on the ability of the company to purchase raw materials. The
purchase of funds with the goal of meeting a company's financial obligations is considered to
be a component of business financing. Both a source of operating capital and a source of
financial diversification, it serves two functions. In this study, the topics of finance and
market value are explored. They also differ in terms of how they are applied in the context of
financial reporting.
Section 01
Importance of Financial Management
Organizations use financial management to control their funding and finance-related
processes. Funds are accessible to satisfy daily business requirements and are used effectively
(Adil & others, 2013). Among the many responsibilities of financial management are making
decisions about investments, purchasing fixed assets, and finding new sources of finance.
Assists in financial operations' planning, organization, and management Decisions on
shareholder returns are also part of this. Using this information, managers are able to make
more educated judgments about the company's benefits, losses, and costs. They can see
where their company's money is being spent, and they can cut down on waste. In order for a
firm to grow, financial management plays a significant role (Moyer, McGuigan & Rao,
2014).
Financial Planning: Financial management helps in the planning of corporate finances.
Other than that, it involves getting ready for things like budgets and money. It helps firms
prepare for difficult scenarios that may develop due to environmental changes. Having a clear
understanding of one's financial situation is important to the success of any company. A
company's costs, expenses, credit lines, and earnings can all be controlled by it (Siekelova &
others, 2017).
Funds: Financial management helps companies to collect finances through less expensive
sources that are suited for the company's requirements. When it comes to running a business,
money is vital. It ensures that a company has the money it needs when it needs it. It's required

for daily operations, acquisitions, debt payments, and raw material purchases.Financing:
Financial management helps a company's manager allocate funds effectively. It gives
businesses insight into how their money is being spent and helps them cut expenses.
Decisions: Financial management helps managers make decisions that have an impact on the
organization's operations. Because every department's activities necessitate monetary support,
financial decisions have ramifications throughout an organization. Achieving long-term goals
is aided by these decisions.
Increase profitability: Financial management ensures effective use of cash to maximize a
company's profitability. Budgeting, cost analysis, and other techniques of cost management
boost firm profitability. This minimizes borrowing costs by encouraging workers to save
(Shapiro & Hanouna, 2019).
Section 02
Financial Statements and Ratios
Using financial statements as a tool, an organization may keep track of its financial health
and progress during the reporting period. Operation and function planning is aided by these
three financial statements:
Income Statement: The income statement is a representation of a company's long-term
success, as well as its productivity and the resources required to get there. There's a profit and
loss account here to show how accurate profits and expenses are for the company. This is a
critical part of evaluating the company's income and expenditures from significant swings in
operating costs, R&D costs, and raw material costs (Kanapickienė & Grundienė, 2015).
Balance Sheet: The balance sheet is an essential aspect of financial statements since it
accurately depicts management's ultimate position. The monetary worth of assets and
obligations, as well as equity, must be equal. According to certain formulae, assets are
equivalent to loans and capital. In a balance sheet, the left and right sides must always be
equal. (Bhargava & Shikha, 2013).
Cash Flow Statements: Cash flow statements are used to examine how much money a
business has taken in and spent over a specific period of time. The operating, investment, and
financing components of this company's finances are represented in this financial statement.

These practices make it easier for investors and analysts to evaluate a company's financial
performance, allowing them to make more informed decisions. This makes it easier for
managers to make well-informed decisions and reduces financial risk. Cash situations are
summarized in this area, which shows how successfully the organization will cover its debt
commitments and operating expenses (Wong & Joshi, 2015).
There are a wide variety of ratios used to evaluate a company's profitability and liquidity. A
few examples of how financial management makes use of ratios are as follows:
Comparatively speaking: An organization can benefit greatly from using ratios to compare
itself to others in order to take the necessary proactive moves. Investors and stockholders
used this to compare the current year's performance to the prior year's outcomes.
Helps in Decision Making: Assisting management in making efficient decisions and taking
appropriate measures in the firm, they were ready to aid Analysts can make inferences about
the company's performance based on this data.
Supports in Planning: Predicting events and roles for the future based on an estimated
number of years was incredibly helpful in financial planning and forecasting.
Shareholders and investors can better plan their investment strategy with the help of these
tools. External parties having an interest in the company's financial status often gain a
knowledge of this in this way (Hosaka, 2019).
Section 03
Explanation of the Use of Ratios in Financial Management
Net Profit Ratio: Profit margin, or net margin, is a percentage of sales that defines net
income or profit. The revenue to net profit ratio is calculated by dividing net income by total
revenues. The net profit margin is given as a decimal percentage. A company's net profit
margin is computed by dividing net profit by total sales. Business profitability is measured by
the profitability of a company. Profitability of a firm can be determined by subtracting the
income generated by sales from all of the expenses incurred by the company (Brigham &
Ehrhardt, 2019).
Net profit margin = 43057 / 189711 * 100

= 22.69%
Gross Profit: Revenue is divided by the amount left over after subtracting item expenses to
get gross profit margin. It assesses a company's financial health. The gross margin ratio is a
popular way of expressing gross profit margin as a percentage of total sales in a financial
statement. With the help of this analytical metric, it is possible to express the profit generated
by an organization's primary activity. In order to arrive at this amount, operating expenses
must be removed from net revenues (Brigham & Daves, 2018).
Gross profit margin= 81125 / 189711 * 100
= 42.76%
Current Ratio: The current ratio measures a company's capacity to satisfy short-term
commitments. The current ratio measures a firm's financial flexibility. The permissible
current ratios vary by industry. According to the Financial Accounting Standards Board,
companies with high current ratios pay creditors faster than those with low current ratios. A
high current ratio is less favourable for investors than a low current ratio. If a company's
current ratio is too high, it may not be able to use current assets or short-term borrowing.
Liquidity ratios are used to analyse an organization's capacity to pay short-term
commitments. Besides assets, it contains all current and past obligations (Steinhoff, Lewis &
Everson, 2018). If current liabilities exceed current assets, the current ratio is negative. A
current ratio below one indicates difficulty meeting short-term financial commitments. A
current ratio of less than one is acceptable in some firms, whereas a current ratio more than
one is unacceptable in others. Increasing the rate at which inventory is converted into cash
while decreasing the rate at which accounts payable are due will result in a current ratio that
is comfortably below one. Due to the fact that the organization expects to sell its inventory
for a greater price than the cost of acquisition, the inventory is valued correspondingly.
Therefore, the sale would create more cash than the inventory's balance sheet value as a result
of the transaction. In the event that a corporation is able to acquire funds from customers
prior to making payments to suppliers, low current ratios can be justified (Delen, Kuzey &
Uyar, 2013).
Current ratio = Current assets / current liabilities
= 54349 / 37928

= 2.22:1
Quick Ratio: The quick ratio measures a company's ability to meet short-term commitments
using its most liquid assets. The acid test ratio measures a company's capacity to rapidly pay
down current obligations using near-cash assets (assets that can be converted quickly to
cash). Acid tests are called as such because they are meant to produce quick findings. This
indicator may be used to assess short-term liquidity and debt repayment capabilities... Some
call this ratio the acid test ratio. A one-to-one ratio is suitable for short ratios. A company's
liquidity ratio measures how effectively it can meet its commitments (Brigham & Houston,
2021).
Quick ratio = (Current assets – inventory) / current liabilities
= (84349 – 28571) / 37928
= 1.47: 1
Business Review Template
The above ratio analysis shows that a company's productivity is more profitable compared to
its principal operations. Based on the company's activities, a high gross profit margin may be
deduced. As a consequence, the corporation's net profit margin must be reduced, which may
be accomplished by cutting down on superfluous spending. The financial health of an
organization, apart from that, seems to be exceptional. The organization must cut unnecessary
expenditures and maintain a careful watch on its finances in order to improve its commercial
competence.

Section 04
Processes to Improve Financial Performance
Many factors affect an organization's financial health. They may take urgent action to better
their position. A company's financial performance may be enhanced in many ways. Here are
a few:
Spending less is the best way to save money. Examine all alternatives for supply, equipment,
and services. Look for methods to save on bank accounts and insurance. Consider making
periodic or postponed payments on significant bills to save cash.
Unpaid payments may harm a company's cash flow and financial viability. If this occurs
often, a debt collector may be required. Also, remind debtors of their obligations on a regular
basis. The contract should also state when payments are due and what happens if they aren't.
Debt is a major factor in improving your company's finances. Debt consolidation may be
beneficial. Debt consolidation is a better alternative for people with many debts. It's always a
good idea to lower prices when it's feasible and lucrative. Verify that the firm isn't losing
money. In many cases, even a little decrease might help make their products and services
more appealing to customers (Hosaka, 2019).
In this situation, the corporation reduced non-operating expenses to improve financial
outcomes. So their net income increased 126.77 percent this year. So they improved their
financial performance by cutting costs.
Conclusion
In light of the data shown above, it is reasonable to conclude that solid financial management
is essential to the survival of a corporation. Generally speaking, it is the job of supervising or
managing the financial activities of a business. The financial management of an organization
may be used to assess the overall success of the company. All of the following functions are
incorporated in this strategy: fixed asset management, revenue identification, accounting, and
payment processing. In addition, the financial status of a corporation may be determined by
examining its financial accounts. It is a documented record of a business's financial
transactions that is maintained by the company. Information on finance that is important to
companies may be found on this page. A financial statement may help to enhance a
company's financial situation as a result of these characteristics.

Calculated financial statements help a company's management team make better choices,
increase performance, and achieve long-term profitability and growth. Financial statements
include a company's balance sheet, income statement, and cash flow statement. Ratio analysis
also helps a business measure its overall performance and productivity by measuring its
liquidity, profitability, organizational, and efficiency levels.
Reference
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Cengage Learning.
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Sons.
Kanapickienė, R. and Grundienė, Ž. 2015. The model of fraud detection in financial
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Hosaka, T., 2019. Bankruptcy prediction using imaged financial ratios and convolutional
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Brigham, E.F. and Ehrhardt, M.C., 2019. Financial management: Theory & practice. Cengage
Learning.

Brigham, E.F. and Houston, J.F., 2021. Fundamentals of financial management: Concise.
Cengage Learning.
Delen, D., Kuzey, C. and Uyar, A., 2013. Measuring firm performance using financial ratios:
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Appendix
Income Statement
Balance Sheet