Importance Of Financial Management Assignment
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In this report the concept along with the importance of financial management will be discussed. Some major statements of finance will also be discussed in the report such as cash flow income statement and balance sheet. Furthermore, some ratios of finance will also discuss it in the report along with the methods to bring improvement in the financial performance of any company.
Financial management is essentially the most common way of controlling, observing and arranging the money related exercises of an association to break down the presentation of the organization and afterward make proper advances and moves to improve the monetary assets and execution of that association. Financial management it's basically an activity which is used by the managers of the company to plan and control their financial activities in the company. By making meaningfully strategies the managers can analyze the efficiency of their performance in all the financial terms of the business.
Financial management has numerous significance and importance through which the managers of the organization can receive various benefits in their business. The management of finance is very important and essential to make planning about the financial resources and funds. It is also very essential to enhance the overall profitability and liquidity of the organization. The managers of the organization can understand the importance of acquired funds and they effectively use them for the betterment of the organization through financial management (Prawirodipoero et al. 2019). Management of finance is essentially a movement which is utilized by the supervisors of the organization to plan and control their monetary exercises in the organization. By making serious techniques the chiefs can investigate the effectiveness of their exhibition in every one of the monetary terms of the business.
The main financial statements
Financial statements are basically the records regarding the activities of the business and through which the managers of the organization can overview their performance and activities of their business. The statements of finance are mainly made by agencies of the government, various accountants and companies in order to see the accuracy of their financing, taxes and investing activities. The statements of finance include three basic statements which are income statement, balance sheet and the cash flow statement.
This is the statement where the overall expenditures along with the incomes revenues and total earnings of the organization are being recorded. This income statement is mainly formed by using prior to two or three years of data in order to compare the performance of the organization in each year (Elomäki and Ylöstalo, 2021). The income begins with the value of total revenue of the firm in that particular year from which the cost of revenue is deducted in order to provide either gross loss or the gross profit of the firm in that particular year. These gross profit is basically the gross earning or gross loss of the firm which occurs after deducting the manufacturing along with the selling costs and expenses from its total revenue in that year. In this income statement the general uses alongside the livelihoods incomes and absolute profit of the association are being recorded. This pay articulation is fundamentally shaped by utilizing a few years of information to analyze the presentation of the association every year (Ma?lach et al. 2019). This statement mainly considers the overall expenditures and revenues of the firm and after deducting all the expenditures from the value of its total revenue a earning is made by the firm which is known as Net income.
The balance sheet usually shows the position of the firm's liabilities, assets and the equity of shareholders and by reviewing which improvements are being made by the manager of the firm. The structure of the balance sheet is prepared in such a manner that the value of total assets including current along with fixed assets should be equal to the value of the firm's total equity and liabilities (Arofah et al. 2018). The balance sheet has various uses in order to determine if the organization is performing stable in terms of its profitability and liquidity or not. By preparing a balance sheet the managers of the association plan and control their financial activities in the association. By creating genuine methods the bosses can examine the viability of their display in all of the financial terms of the business. In this statement firstly the valuation of assets are recorded and any changes that have been made in the income statement are required to be mentioned here and then the value of total current assets are being calculated. Secondly the fixed assets are being recorded and added with the value of total current assets in order to calculate the overall assets of the firm. Under the valuation of assets all the major liabilities both current and non current are being recorded in the statement of balance sheet which are later added together and form as total liabilities of the firm (Sari et al. 2020). Furthermore, by recording the equities of the firm and summing them with the value of total liabilities, overall equity and total liabilities are being formed which should be equal to the total assets recorded and computed in the balance sheet.
Figure 2: Example of Balance Sheet
Cash flow statement
The statement of cash flow is made after the statement of income and balance sheet of the firm which measures the abilities of the firm on how effectively it generated the cash to deal with its debt. This statement also shows the firm’s ability of managing the funds and effectively using it and covering three essential areas of activities of generating the cash (Bismark et al. 2018). The statement of cash flow provides a record of the firm's overall operations of cash generation and how well the firm is spending those generated cash for better earning and growth.
The statement of cash flow begins with the activities of the firm's operation which includes valuation made in depreciation, accounts receivable and payable, inventory etc. Furthermore, expenses like wages, payments of taxes, any receipts of cash and interest received on the payment are also recorded under these activities of this statement of cash flow.
After generating the cash from the activities of the firm's operations, the investing activities of the firm are performed in the statement of cash flow. Under this section, the activities made in fim’s investment such as asset sale, customer receipts on investment, loans are being recorded (Thom, 2019). Any fluctuations made in the assets, equipment or the investment which relates to cash are recorded in the investing activities of the statement of the cash flow.
At the end, the activities relating to the finance of the firm are made in the statement of cash flow which basically record the activities such as issuance of debt, repurchasing any stock, issuance of equity, payment of dividends and loans etc.
Figure 2: Example of Cash flow statement
Use of ratios
Analyzing the financial performance of the firm is very essential and therefore to determine the performance, managers of the firm use different financial ratios. Through the use of those financial ratios the position of a firm's liquidity, efficiency and profitability can be determined and later be enhanced by taking meaningful actions against it.
The benefit of the not entirely settled by ascertaining the proportions of productivity like edge of working benefit, edge of net benefit and edge of net benefit (Yahaya et al. 2019). The benefit essentially shows how successfully the firm is producing income which connects with its income, cost of activities, resources of the monetary record or the value. The ratio of gross profit is one those ratios of profitability which can be computed as:
“Gross profit ratio = gross profit / net sales x 100”.
The gross margin ratio of the given company has been computed as 42.76% and it can be said that as the margin is below 50% it is not profitable for the company. Also the net profit of the company has been computed and valued as 22.70 which is very high and less profitable for the organization.
This ratio related to the gross profit shows the earnings of the firm meeting the cost of revenue activities.
The Liquidity proportion gives and shows the place of a company's liquidity on a specific time which incorporates the capacity of the firm to meet its transient business exercises and obligations without obtaining extra money capital. Perhaps the most valuable liquidity proportion is the current proportion which shows the company's capacity of paying off and clearing the current liabilities against its present resources (Kim and Mason, 2020). A current ratio is ideal only if calculated as 1 or above and the liquidity position of the organization will be better if the current ratio of it will be higher. The current ratio of any firm can easily by computed as:
“Current ratio = current assets / current liabilities”
As per the given company, calculation of current ratio has been made and the ratio has been computed as 2.22. As this calculated ratio is above 1.5 the liquidity of the company is stable and the value of its current assets somehow exceeds its current liabilities. Also the quick ratio of the given company has been generated as 1.23 which again shows the effective position of the company liquidity.
The efficiency ratio is usually used to determine how the firm is utilizing its total liabilities together with its total assets internally. This ratio can compute the receivables turnover, liabilities repayment, the use of equipment like machinery and inventories. The ratio of efficiency is furthermore used by the managers to determine their performance in the short term and its ability to effectively utilize its assets in the business in order to generate higher earning and income (Bary?a-Matejczuk et al. 2020).
The ratio of inventory turnover of the given company is derived and computed as 3.80 and for being ideal it should be minimum 5. Also the ratio of assets turnover of the given company is generated as 1.23 which is lower than the ideal ratio 2. Therefore, it has been determined that the ability of the given company to use assets and inventory to generate income is not very attractive.
Methods to improve the financial performance
A number of methods can be adopted by the accounting manager to improve the financial performance of the firm and if used effectively, the firm could achieve higher growth in financial terms. These methods are discussed below:
- In order to enhance the financial performance of the firm, the manager should recover all the debts of the firm which are outstanding. This clearing off the debts could possibly enhance the gearing ability of the firm and likewise improve the financial health and performance of the firm.
- One another essential action which can be taken by the manager of the firm to enhance the firm’s financial performance is reducing the unnecessary expenditures in the business. The expenses can be reduced by moving to cheaper available options for energy consumables and production materials.
- Selling the assets in the business is also an essential method to improve and influence the firm to improve its performance in financial terms (Prihartono and Asandimitra, 2018). The firm could sell those assets which are unnecessary and by this action some cash would possibly be generated and also the costs of storage for those assets can be reduced.
- Adopting new techniques and strategies of marketing could also bring enhancement in the financial performance of the firm. Some of these strategies are not very costly and can be used effectively by the manager of the firm to improve the financial health. Marketing techniques like advertisement of the commodities through social media and websites could be great options for the firm which also does not require higher cost.
In the above report some major discussions have been made regarding the importance along with the concept of financial management of the firm. A few significant assertions of financial statements likewise are discussed in the report, for example, income statement, balance sheet and statement of cash flow. Besides, a few financial ratios have been computed and examined in the report alongside the strategies to improve the financial health and performance of the firm.
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