Financial Management: Definition, Importance, Financial Statements, Ratios And Analysis

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

The present report is developed for conducting discussion of the concept of financial management and explanation of the use of ratios. This is followed by completing the information on the given business review template, income statement and balance sheet. Lastly, the given case study information is sued for carrying out profitability, liquidity and efficiency ratio analysis of the company and providing recommendations to improve its financial performance.

The concept of financial management can be stated as strategic planning, directing and controlling the financial activities of an organization. It is known to be an important aspect of business management concerned with effective use of capital resources for carrying out business operations (Schmidlin, 2014). The major objectives of financial management within an organization can be stated as follows:

• Ensuring adequate availability of funds within an organization
• Maintaining shareholders trust and providing them good returns on their investment
• Optimum and effective utilization of funds

The scope or importance of financial management within an organization is limited to taking adequate financial decisions for maximizing the shareholder interests that are stated as follows:

• Investment Decisions: The business managers need to take decision regarding the investment to be incurred for taking capital budgeting decisions concerning the allocation of funds for long period of time such as purchasing fixed assets. In addition to this, it is also concerned with working capital decisions.
• Financing Decisions: The business managers also need to take decisions regarding financial planning or capital structure decisions. The financial planning decisions is related to estimating the sources and application of funds whereas capital structure decisions are concerned with identification and selection of sources of funds (Beyer, 2014).

The financial statements are the reports that depicts the financial position of a company. They can be stated as written records developed for illustrating the business activities and financial performance of a company. The major type of financial statements is described and discussed as follows:

• Income Statement: This financial statement depicts the overview of revenue, expenses and net income of a company. The major purpose of this financial statement is to facilitate the potential financers and investors of a company to determine its profitability. The income statement is used by the investors for evaluate the past performance and comparing it with the competitors. Also, the income statement of a company can be used by investors for estimating its future performance and cash flow position (Birchall, 2014).
• Balance Sheet: This financial statement of a company is used for reporting its assets, liabilities and equity position. The balance sheet of a company needs to balance the assets and liabilities equal to the shareholders’ equity.  It depicts the financial position of a company and is divided into three sections that is assets, liabilities and the shareholder’s equity. It is often used by the investors for comparing the debt levels to the equity invested and evaluating the appropriateness of leverage within the company.
• Statement of Cash Flows: The cash flow statement provides an overview of the cash flows of a company from its operating, investing and financing activities. The operating activities depicts the net income position, investing activities illustrates the cash flow from debt as well as equity financing while the financing activities illustrates the cash flow from debt and equity position (Bens and Young, 2018).

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

The Net Profit for the year 2016, is £43,057,000 (2015: £18,987,000). 

The Company’s key financial and other performance indicators during the year were as follows:

Turnover from continuing operations increased by 5.6% during the year, primarily due to the acquisition of the Extinguishers business on 1 May 2015, which made a full years contribution in 2016. 

Gross Profit = £81125

Net Profit = £43057

Net Profit increased in 2016 by 126.8% during the year. 

Shareholders’ equity increased by 32.9% by £20758.

The company’s “quick ratio” (Current Assets (excluding stock) divided by Current Liabilities) is 1.47:1

The company’s “current ratio” (Current Assets divided by Current Liabilities.) is 2.22:1

Change in profit for the financial year = (43057-18987)/18987 = 126.8%

Current Assets as % if current liabilities = 84349/37928 = 222%

Shareholder’s equity increased by (83815-63057) = 20758

Quick Ratio = (Current Assets – Stock) / Current liabilities

For year 2016 = (84349-28571)/37928 = 1.47:1

Current Ratio = Current Assets / Current Liabilities

For year 2016 = 84349/37928 = 2.22:1

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

This is included within appendix

Using Excel completing the Balance Sheet

 Attached in Appendix

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

Gross profit = 42.76%

Net profit = 22.70%

The gross profit of the company is 42.76% which means that it is realizing adequate profit before deduction of the interest and tax payments. It is making good profit before deduction of the cost of goods sold. The gross profit margin ratio of the company is higher and therefore it can be said that its profitability position is healthy. The net profit ratio of the company is also higher that is 22.70% which means that it has attained good net profit in comparison to the operating expenses. The company’s effectiveness in generating profits can be regarded as it has realized adequate profitability in comparison to sales and operating expenses (LLC and Rist, 2014).

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

Current Ratio = 2.22:1

Quick Ratio = 1.47:1

The current ratio of the company is 2.22:1 that means it has sufficient current assets in comparison to the current liabilities. Also, the quick ratio for the company is also higher than 1 that is 1.47: 1 which means that it has sufficient quick asset base that includes cash and cash equivalents to meet the short-term financial obligations. The company liquidity position is strong as its current as well as quick ratio is more than 1which means that there does not exist any financial risk for meeting the current liabilities that is due within a year (Beyer, 2014).

Total assets turnover ratio = Revenue / Total Assets

= 189711/153647

= 1.23 times

Account Receivables turnover ratio = Revenue / Account Receivables

= 189711 / 26367

= 7.19 times

The assets turnover ratio of the company is 1.23 times which means that it is having higher efficiency in generating revenue or sales. The company is effective in generating sales from the use of its asset base. Also, the accounts receivables turnover ratio of the company is 7.18 which is sufficiently high meaning that is effectively collecting the debts towards the credit extended. This means that efficiency position of the company is good as it is having efficiency in use of its asset base as well as collecting debts from the customer (Follett, 2011).

Reduction of the Operating Expenses: The company need to focus on reduction of the operating expenses for maintaining increase in the net profit position of the company.

Recovering Outstanding Payments: The company need to focus on collecting debt in timely manner for ensuring maintaining good cash position and minimizing the risk of default.

Reduction of the Prices: The company need to focus on minimizing the prices for improving the financial position by increasing the sales or revenue position for the customers (Bens and Young, 2018).

Conclusion

It can be stated from the overall discussion held in the report that financial management is largely important within a company to maintain adequate financial control and stability. The case study has depicted that the given company has maintained good profitability, liquidity and efficiency position.

References

LLC, P. and Rist, M. 2014. Financial Ratios for Executives: How to Assess Company Strength, Fix Problems, and Make Better Decisions. United States: Apress.

Follett, R. 2011. How to Keep Score in Business: Accounting and Financial Analysis for the Non-Accountant. United Kingdom: Pearson Education.

Beyer, S. 2014. International Corporate Finance – Impact of Financial Ratios on Long Term Credit Ratings: Using the Automotive Examples of BMW Group, Daimler Group and Ford Motor Company. Germany: GRIN Verlag.

Schmidlin, N. 2014. The Art of Company Valuation and Financial Statement Analysis: A Value Investor’s Guide with Real-life Case Studies. Germany: Wiley.

Birchall, A. 2014. Financial Analysis and Control: Financial Awareness for Students and Managers. United Kingdom: Elsevier Science.

 Bens, D. A. and Young, S. 2018. Corporate Financial Reporting and Analysis: A Global Perspective. United Kingdom: Wiley.

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