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Introduction Of Importance Of Financial Management Assignment
In this present age, many businesses have followed their financial management to increase their economic sustainability and operating profit in an effective manner. Maintaining properly income statement and its various operations can also help the companies to properly record the history of financial dimension of the business substantially. On the other hand, financial ratios have also played an important role in order to maintain and calculate the measures of the financial statements by which the companies are maintaining their economic progression as well. Taking this concept, this report is shedding light on the importance of financial management and the strategies to maintain this aspect in an appropriate manner.
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Section 1: Definition and discussion of the concept and importance of financial management
In simple terms, "financial management" is one of the most significant business functions that can deal with the investments of the availed financial resources in a pattern that best business success as well as "return-on-investment (ROI)" can also be achieved. A professional plan regarding "Financial management" can easily organize and manage all the processes of transactions in a particular business (Broyles, 2020). Basically, it can be stated that they can focus on the procedure of resourcing the actual capital whether this is from the primary investments by the business owner or holder, "debt financing", "venture funding", "public issue", or many other sources. In this case, the professionals in financial management are also very responsible for the allocation of funds in an effective way in order to assure enormous "financial stability" as well as the enhancement of the company substantially.
On the other hand, it has been observed that the financial management of the companies can measure the goals of the business, formulate various policies, outline the actual procedures, develop various social reflects and programmes, as well as induce the economic budgets that are associated to all the financial operations of a business (Brigham and Houston, 2021). Through an effective and streamlined management of finance practices, it is possible to assure that there are an effective amount of funds and many other financial sources available for the organization at any phase of its business. The proper significance of "financial management" can also be accessed by undertaking an observation of its principal mandate such as:
- Availability of required funds
- Managing a proper balance between the expenses and the income process in order to maintain the financial position and stability substantially.
- Ensuring effective and high "return on investment"
- Implementing as well as executing the growth of the business and the plan of expansion.
- Safeguarding the whole company that can help to mitigate the issues regarding the uncertainty of the market and maintain a second plan for improving the finance practices effectively.
Section 2: Main financial statements and use of formal ratios in financial management
Proper financial statements are basically written records which can ultimately convey the activities of a business as well as the performance regarding the economic dimension of a company. In recent days, financial statements of a company are also positively audited by various government agencies, and its account, various fund management companies and many more in order to maintain the context of accuracy as well as forward to the rate of tax, the activities of financing, and investment purposes in an effective manner (Osadchyet al., 2018). For maintaining the profit, the actual, as well as effective initial financial, include "the balance sheet", "income statement", "statement of cash flow", and "statement of changes in equity".
Moreover, various nonprofit entities utilize identical but several sets of financial statements effectively. Analytically, a detailed balance sheet depicts a detailed description of assets, equity of shareholders and liabilities as an economic snapshot in time. An income statement of an organization is initially focused on the revenue of the company as well as various expenses at the time of a specific period. In this regard, once the overall expenses are actually subtracted from the annual revenues, then the statement generates the profit figure of the company which is called net income (Palepu et al., 2020). "The cash flow statement (CFS)" determines how well an organization creates cash in order to pay its obligations of debt, fund its executed expenses, as well as invest in funds. On the other hand, the statement of "changes in equity" history shows how the overall profits are effectively executed within an organisation for its upcoming growth and shared with external parties.
Role of financial ratios
Various "Financial ratios' ' provide business owners with an effective way in order to analyse the performance of their company as well as differentiate it from other identical businesses in the entire industry. Financial Ratios determine a significant relationship among more elements of the entire financial statements (Brigham and Daves, 2018). In this context, it can be stated that they are often utilized most efficiently when outcomes over several periods of time are compared effectively. In this case, it can be noted that there are various kinds of financial ratios are availed that are also able to improve the financial performance of the company substantially. These ratios are such liquidity ratios, profitability ratios, leverage ratios, operations ratios and many more.
Profitability ratios
In this case, "Profitability ratios" are a set of "financial metrics" that are crucial in order to assess the ability of a business to create earnings that are related to its "annual revenue", "total operating costs", "assets of the balance sheet", or "shareholders' equity over the time which are using data and information from a particular point in time (Shim, 2022). Profitability ratios can also be differentiated from efficiency ratios, which consider how well an organization is able to use its own assets in order to develop an income that is opposed to after-cost profits. There are various profitability ratios that are connected with profitability ratios such as "Net profit margin", "coverage ratios" and return on equity of shareholders and many more.
Leverage ratios
The leverage ratio is the most effective financial measurement that focuses on what amount of capital obtains in the typical form of "debt (loans)" and maintains the capability of a firm in order to meet its financial values (Alexander, 2018). The category of leverage ratio category is too significant because companies rely on the actual mixture of "equity" and "debt to finance their operations'', and identifying the quantity of debt held by an organization that is helpful to evaluate whether it can able to pay its liabilities as they come due. Multiple leverage ratios are debt-to-equity ratios and debt-to-asset ratios.
Liquidity ratios
Liquidity ratios are the most fundamental financial metrics that are specifically used to measure the ability of a debtor in order to pay off present obligations of debt without enhancing external capita (Brigham and Daves, 2018). Liquidity ratios can measure the ability of a company to pay obligations of debt as well as its overall financial safety margin through a proper calculation of various liquidity metrics including "the current ratio", "quick ratio', and "operating cash flow ratio" in an effective manner.
Section 3:
The NetProfitfortheyear 2016,is£ 43057,000(2015:£18,987,000).
TheCompany’skeyfinancialandotherperformanceindicatorsduringtheyearwereasfollows:
| 2016 £’000 |
2015 £’000 |
Change % |
| Turnover(continuingoperations) |
189,711 |
179,587 |
+5.6% |
| Profitfor the financial year |
43057 |
18,987 |
+ 126.7 % |
| Shareholder’sequity |
83815 |
63,057 |
+32.9% |
| Currentassetsas%ofcurrentliabilities |
? % |
304% |
-82% |
| Customersatisfaction |
4.5 |
4.1 |
+10% |
| Averagenumberofemployees |
649 |
618 |
+5% |
Turnoverfromcontinuingoperationsincreasedby5.6%duringtheyear,primarilyduetotheacquisitionoftheExtinguishersbusinesson1May2015,whichmadeafullyearscontributionin 2016.
Gross Profit = £81125,000
Net Profit = £43057,000
Net Profitincreased in 2016by126
7 %duringtheyear.
Shareholders’equityincreasedby32.9% by 83815,000?.
Thecompany’s“quickratio”(CurrentAssets(excluding stock)divided byCurrentLiabilities)is 1.47
Thecompany’s“current ratio”(Current Assets divided by Current Liabilities.)is 2.22
| Income statement for the year ended 31st December 2016 |
| 2016 |
| £000 |
| Turnover |
189711 |
| Less cost of sales: |
| Material Cost |
42597 |
| Production Cost |
15231 |
| Labour Cost |
50758 |
| 108586 |
| Gross profit |
81125 |
GP % = |
42.7 |
| Less Expenses: |
| Administrative expenses |
13751 |
| Other operating overheads |
22374 |
| Interest |
1943 |
| Total Overheads |
38068 |
| Profit/(loss) for the financial year |
43057 |
NP %= |
22.6 |
Table 1: Income statement
(Source: Created by the learner)
Their income statement is considered a key financial statement as it shows the financial performance of a company over some time. From the calculations, it can be stated that the company earned a total gross profit of 81125,000 British pounds in the year 2016. In addition, the company maintained a gross profit margin of 42.7% which is considered above average. Along with this, the company's net profit stood at 43057,000 British pounds. The company's net profit margin stood at 22.6%. Therefore, it can be observed that the company's financials have improved as the company has witnessed a significant rise in both its gross profits and net profits. The company's total cost of sale goods stood at 108,856,000 euros in 2016. Align with this, the total overhead cost of the company stood at 38068,000 British pounds. The company can increae the profit by reducing cost expenditure. AS the company witnessed a signifacnt decline in its interest paymnets for the financial year of 2016, which signifacntly positively impacted the profitability aspects of the company.
| Balance sheet as at 31 December 2016 |
| 2016 |
| Total |
| £000 |
| 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 |
1,15,719 |
| 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 |
Table 2: Balance sheet
(Source: Created by the learner)
The company's balance sheet witnessed an increase in shareholders' equity. The shareholder's equity stood at 83815,000 in 2016 which was 63057 in the year 2015. It signifies that the shareholders' equity has increased by 32.9%. Along with this, the current assets of the company stood at 84349, 000 pounds in 2016. In addition, the current liabilities stood at 37928,000 pounds in 2016. The current portion of the company stood at 2.22. Along with this, the working capital stood at 46421,000 pounds in 2016. It signifies that the company has adequate working capital to run its daily operations smoothly. Most importantly, the net assets of the company stood at 83815,000 euros in 2016.
Ratio analysis is a key financial metric to evaluate the financial performance of a company. There are different types of financial ratios, however, the most important ones are the current ratio, liquidity ratio and profitability ratio. When it comes to the current rating of the case study organisation, the calculations depict that the company's current ratio is 2.22. It means that the company is 2.22 times the current assets as compared to current liabilities. It signifies that the company can pay its liabilities in an effective manner and does not have high risks of default on current t liabilities. Following this, the company's quick ratio stood at 1.47 which signifies that the company can easily pay its short-term debts with the use of its current assets. In addition, the company also has an adequate number of current assets in its balance sheet to maintain liquidity for daily operations. Therefore, it can be stated that the company's financial performance is considerably strong.
Section 4
The company can increae the profit by reducing cost expenditure. AS the company witnessed a signifacnt decline in its interest paymnets for the financial year of 2016, which signifacntly positively impacted the profitability aspects of the company. Along with this, the compabny should also reduce its other overhead cost expenditure which can help the company in improving the overall profits. Along with this, the company should increase the total turnover. Turnover refers to the total sales of a company that it made during a particular period along with other income.
Conclusion
Good financial performance is a key requirement of companies as it helps in acquiring new business opportutnities. The financial ratios also play an important role in assessign the fianncial performance of companies. The company witnessed a signifant increase in its shareholders’ equity in the year 2016.
Reference list
- Alexander, J., 2018. Financial planning & analysis and performance management. John Wiley & Sons.
- Brigham, E.F. and Daves, P.R., 2018. Intermediate financial management. Cengage Learning.
- Brigham, E.F. and Houston, J.F., 2021. Fundamentals of financial management. Cengage Learning.
- Brigham, E.F. and Houston, J.F., 2021. Fundamentals of financial management: Concise. Cengage Learning.
- Broyles, J., 2020. Financial management and real options.
- Osadchy, E.A., Akhmetshin, E.M., Amirova, E.F., Bochkareva, T.N., Gazizyanova, Y. and Yumashev, A.V., 2018. Financial statements of a company as an information base for decision-making in a transforming economy.
- Palepu, K.G., Healy, P.M., Wright, S., Bradbury, M. and Coulton, J., 2020. Business analysis and valuation: Using financial statements. Cengage AU.
- Shapiro, A.C. and Hanouna, P., 2019. Multinational financial management. John Wiley & Sons.
- Shim, J.K., 2022. Financial management. Professor of Finance and Accounting Queens College City University of New York.
