Essentials of Financial Management

Introduction

Financial management is important for any organization, , for those who are seeking business dissertation help. In order to start up or to operate an effective business, there is a requirement for excellent understanding on financial management. For any organization to run, it is vital to understand what financial resources are available and how these resources can be utilized effectively. Finance gives the outline for taking decisions regarding the way funds require be obtaining and investing. Based on this aspect, the report discusses about financial management and key financial statements. It also demonstrates key financial measurement like ratio analysis. Various financial ratios, like profitability, liquidity and efficiency has been measured in this report.

Section 1: Definition and discussion of the concept and importance of financial management

Financial management mentions to strategic planning, forming, guiding and controlling of financial activities in an organization. It comprises utilizing management values to financial resources of a company. It gives the pathways for accomplishing objectives of a company. The key responsibility of a financial manager is to evaluate organizational effectiveness by appropriate distribution, attainment and management of finance (LSBF, 2018). The importance of financial management is as follows:

Financial planning: Financial management assists to determine the financial obligation of business concern and leads to consider financial planning of the concern.

Attainment of funds: Financial management includes attainment of necessary finance to the organization. Obtaining required finance play a vital part in financial management, which comprise likely source of finance at least cost.

Appropriate utilization of funds: Appropriate utilization and allocation of funds mentions to enhancement of functional effectiveness of the organization. When finance manager utilizes the funds appropriately, they are able to minimalize the cost of capital and to enhance the value of the organization.

Financial decision: Financial management assists to take comprehensive financial decision in the organization. Financial decision influence the whole business function, as there is a direct connection with several division activities, for example, marketing, production and human resources among others.

Enhance profitability: Profitability of an organization is subject to the efficiency and appropriate usage of funds by the organization. Financial management assists to enhance the profitability position of the organization, with the assistance of robust financial control instruments, for example budgetary control, ratio analysis and cost volume profit analysis among others.

Enhance value of organization: Financial management is vital in the area of growing the wealth of the organization. Ultimate objective of any organization is to accomplish maximum profit and high profit results in expansion of wealth of the shareholders and the organization as a whole.

Encourage savings: Savings are achievable only when the organization earns high profit and enhance the wealth. Efficient financial management assists to encourage and to organize corporate savings (Kileo, 2016).

Section 2: Description and discussion of the main financial statements and explain the use of ratios in financial management

Financial statements are regarded as written records that convey business functions and financial performance of an organization. Financial statements are frequently audited by accountants or accounting firms in order to certify accurateness for taxing and investing purposes. Shareholders depend on financial statements in order to evaluate the performance of an organization and make predictions regarding future course. The three main financial statements are:

Balance sheet: Balance sheet is a report of an organization’s financial value with respect to book value. It is categorized into three portions, which are, assets, liabilities and shareholders’ equity. Assets are the outcome of the organization from historical activities, which are forecasted to generate financial advantages. Assets yield future economic advantages. On the basis of term of utilization, assets are classified into current assets and non-current assets. Current assets like cash and account receivable describes regarding the operational effectiveness of an organization. Noncurrent assets like land & building, machinery & equipment and property among others tells regarding long run financial investments. On the other hand, liabilities include its expense preparations and the debt capital it is paying off. Liabilities are also categorized as current liabilities and non-current liabilities. Current liabilities are bases of external financing made accessible to an organization and which require to be paid within one year, like short run loans and account payable among others. Non-current liabilities are long run debts for above one year. Then again, shareholders’ equity comprises details on equity capital investments and retained earnings from intermittent net income. The balance sheet requires balancing with assets subtracting liabilities equaling shareholders’ equity (Elliott & Elliott, 2013). The resulting shareholders’ equity is regarded as organizational book value, which is vital performance indicator that enhances or reduces with financial functions of an organization.

Profit and loss statement: Profit and loss statement is another important financial statement, which breaks down income earned of an organization against the expenditures incurred in the business, to arrive at a bottom line, i.e. net profit or net loss. The profit and loss statement is categorized into three portions, which assists to evaluate business effectiveness at three diverse points. It starts with income, and direct expenses related with income in order to derive the gross profit. Afterwards it shifts toward operating profit, which deducts indirect expenditures like marketing, general and depreciation. Finally, it finishes with net profit, which subtracts interest and taxes. Fundamental evaluation of profit and loss statement typically comprises the computation of gross profit margin, operating profit margin and net profit margin, which assists to demonstrate where organizational expenses are low or high at diverse level of the operations (Atrill & McLaney, 2013).

Cash flow statement: Cash flow statement gives an overview of organizational cash flow from operational functions, investment functions and financing functions. Net profit is carried over to cash flow statement where it is involved as top line entry for operating functions. Similar to the title, investing functions comprise cash flows involved with organization wide investments. The financing function section comprises cash flow from debt and equity financing. The bottom line demonstrates the level of cash an organization has accessible. Organizations also use free cash flow statements in order to evaluate the value of the organization. Free cash flow statements appear at net present value through discounting the cash flow, an organization is forecasted to produce through time. Private organizations can maintain free cash flow statement as they grow towards possibly going public (Jones, 2002).

Section 3: Description and discussion of the main financial statements and explain the use of ratios in financial management

Ratio analysis mentions to the evaluation of several pieces of financial data in financial statements of an organization. It measures the connection between two or more elements of financial statements. Ratio analysis permits to follow the organizational performance through time and reveal indications of any risk in business. The ratios help to understand how effectively an organization is performing. There are various ratios and among them, most important are:

Profitability ratios: Profitability ratios evaluate profit and loss statement in order to demonstrate organizational capability to earn profit from the business functions. These ratios typically demonstrate the effectiveness of an organization from earn profit from business. It concentrates on organizational return on investment from assets, capital and equity. These ratios are used in order to judge if an organization is making sufficient profit, therefore is also vital to the thought of wealth(Sutton, 2004).

Liquidity ratios: Liquidity ratios evaluate the capability of an organization to pay the current as well as non-current dues. In short, these ratios demonstrate the cash levels of an organization and the capability to transform other assets into cash in order to pay the debts.

Efficiency ratios: Efficiency ratios are termed as activity ratio, which evaluates the effectiveness of an organization to use the assets in order to earn profit. These ratios frequently observe at the time it requires for an organization to obtain cash from the customers and clients or time requires for an organization to translate stocks into cash. These ratios are utilized in order to enhance the organizational business efficiency, therefore go hand in hand with profitability also (MacLaney & Atrill, 2014).

Solvency ratios: Solvency ratios are also termed as leverage ratios, which evaluates organizational capability to maintain the business indeterminately through evaluating the level of liabilities and equity. In short, solvency ratio recognize the concerns for organizational ability to pay the long run dues, however, it is different from liquidity ratios. Solvency ratios mostly concentrate on the long run sustainability of an organization, rather than the current dues. Better solvency performance indicates better creditworthiness and financially sound organization in the long run.

Section 3: Using the template provided:

Completing the Information on the ‘Business Review Template (Ensure that you display your calculations for this detail)

Using Excel producing an Income Statement for the Sample Organization (see Case Study)

Using Excel completing the Balance Sheet

Gross profit margin

Gross profit margin is important profitability ratio, which computes the proportion of revenue that surpasses the cost of goods sold. In short, it evaluates the effectiveness of an organization to utilize the raw materials and labor in order to sell products profitably. This ratio is vital as it demonstrates how effectively, the organization can produce and sell the products and how profitable is the core business function.

Gross profit margin = (gross profit / turnover) × 100

= (81125/189711) × 100 = 42.8%

From the analysis, it can be observed that gross profit margin is 42.8%. This value indicates that with every £100 of sales, the organization is earning £42.8 before other expenses of business is paid.

Net profit margin

Net profit margin is most important profitability ratio, which evaluates proportion of each pound earned by an organization transform as profit. It demonstrates how effectively an organization is managing the business. It help to understand the proportion of revenue that turns into operational and other indirect expenditures and what proportion of income is left for paying to the investors. The net profit margin of the organization is as follows.

Net profit margin = (net profit / turnover) × 100

= (43057/189711) × 100 = 22.7%

The net profit margin is 22.7% indicating that with sales of £100, the organization is earning net profit of £22.7 after paying all the expenditures of business.

Using the Case study information describing the profitability, liquidity and efficiency of the company based on the results of ratio analysis

Quick ratio

Quick ratio is termed as acid test ratio, which is a liquidity ratio that evaluates the capability of an organization to pay current dues by using the quick assets. These are assets that can be transformed into cash within three months. Following is the quick ratio of the organization.

Quick ratio = (Cash + short term deposits + trade debtors) / current liabilities

= (14632+14779+26367) / 37928 = 1.47

The quick ratio is observed to be 1.47, which indicates the organization has 1.47 times more quick assets than current liabilities. Therefore, it will be able to pay all its current debts through its quick ratio.

Current ratio

Current ratio is another liquidity ratio which evaluates organizational capability to pay the current dues through using current assets. Following is the current ratio of the organization.

Current ratio = current assets / current liabilities = (84349 / 37928) = 2.22

The current ratio of the organization is observed to be 2.22, which indicates that the organization has twice more current assets than current liabilities. Therefore, it will be able to pay all the current dues with its current assets.

Day’s sales inventory

Day’s sales inventory is important efficiency ratio, which evaluates the number of days it requires an organization to sell the inventory. Following is the days sales inventory of the organization.

Days sales inventory = Inventory/cost of goods sold × 365

= (28571/108586) × 365 = 96.03. This specifies that the organization has sufficient inventory to last for 96 days, within 96 days, the organization will turn the stock into cash.

Section 4: Using examples from the case study describing and discussing the processes this business might use to improve their financial performance.

In order to enhance the business procedure, at first, the organization requires maintaining and controlling the expenditure of the business. It will help to increase the profitability performance of the company. The organization is highly liquid therefore, it requires maintaining its liquidity position to as to fulfill the quick liquid cash requirements. However, the organization will require moving the inventory much quicker. Presently, it requires almost three months selling the inventory. Selling the inventory much quicker will result in more revenue and more profit for the organization.

Conclusion

The report defines how financial statements and financial ratios are useful for an organization. It help to demonstrate a clear image about the company performance and financial soundness about the company. In this way, it help to identify the areas of improvement in financial performance.

References

Atrill, P. & McLaney, E. (2013). Accounting and Finance for Non Specialists, 8th Edition. Edinburgh: Pearson Education.

MacLaney, E. & Atrill, P. (2014). Accounting and Finance: An Introduction, 7th Edition. Harlow: Pearson Education Limited.

Elliott, B. & Elliott, J. (2013). Financial Accounting and Reporting, 16th Edition. Harlow: Pearson Education.

Jones, M. (2002). Business Studies, 4th Edition. Harlow: Pearson Longman.

Kileo. (2016). Importance of Financial Management. Available at: https://www.linkedin.com/pulse/importance-financial-management-hamza-kileo [Accessed 22 May 2021].

Sutton, T. (2004). Corporate Financial Accounting and Reporting, 2nd Edition. Edinburgh: Pearson Education Limited

Appendix: 1

Balance Sheet

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