Introduction 

The purpose of the report is to discuss and define the concepts related to financial management. In order to explain the aspects, this report will first discuss and define the financial management concepts. The main financial statements and in which way ratios are used also be explained in the second part of the report. This report will also discuss and evaluate the calculated data of the case study. In which way the organization can improve performance has also been mentioned at the end of the report. 

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

Financial management plays a vital role in the business domain as it is the method of monitoring, controlling, organizing and planning of the financial resources from the perspective to achieve organizational objectives and goals. For controlling the financial activities in the business domain, it is considered as a pivotal practice such as risk assessments, utilization of the funds and other aspects of the relation of the money.

Importance of the financial management 

                                             

Fig: Financial management planning 

Source: (McLaney and Atrill, 2016)

• Financial Planning

In order to determine the required fiancé for the business, financial management plays an important role by helping to make a plan in an effective manner.

• Acquisition of Funds

To the business concern, financial management is involved with the acquisition of the required fiancé.

• Financial Decision

It helps to make strong and sound decisions to affect the entire business operation as there is a direct connection with the various departmental functions. 

• Improve Profitability

It helps to enhance the profitability position of the business with the help of the cost-profit analysis, ration analysis, budgetary analysis devices. 

• Increase the Value of the Firm

It is significant in the field of enhancing the wealth of the stakeholders as the main aim of the business is profit maximization and cost minimization. 

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

As per the definition, a financial statement is a written record that used to explain the financial performance and business activities of an organization. In order to ensure the level of accuracy and for the purpose of the investing, financing and tax, it is normally audited by the accountants, firms or the government agencies.  The main financial statements are explained in the following section with proper justification.

2.1. Balance sheet

The balance sheet is used to explain an outline of the equity, liabilities and assists of the stakeholders as a business picture that represents the fiancés of the organization at the end of a financial year. In terms of the views of the Khansalar and Namazi (2017), it is used to identify in which way assists are funded with the liabilities and listed on the balance sheet as per the liquidity.  As stated by Costa et al,, (2019), by using the balance sheet, the organization can obtain capital and credit, calculate and examine the rations and maintain a balance. Balance sheet documents can be interpreted in two ways, the first one is the Liabilities must equal to assets and the second one is that assets employed should balance the capital employed.  In terms of the views of the Fleckenstein and Longstaff, (2020), the balance sheet is also called the definitive statement from the perspective of the financial position of the organization. At any given moment, it assists to convert the actual position of the organization in the competitive business domain. 

2.2. Cash flow statement 

The cash flow statement is assisted to provide total data in terms of the all cash flow inflows which an organization received from its external investment sources as well as ongoing operations. As stated by Rice (2015), this statement is used to measure in which way an organization manages its cash position  or generates cash to pay its pivotal debt obligation and other related expenditures. Income statements as well as balance statements are complemented through the cash flow statement.  This statement is only a descriptive statement as it is eloped to explain why and in which way the cash of the company changed over the last years. 

2.3. Income statement 

It is also known as the profit loss statement and also used for reporting the financial performance of the organization for a specific period of time. In terms of the views of the Fleckenstein and Longstaff, (2020), from the income statement, the efficiency level of the management, valuable perception of the operations management, performance relative to the industry peers has been easily understood. Income statement helps to cover the following aspects, such as 

• Operating revenues : Realized through the primary actions or activities 
• Non operating revenue: Realized through the secondary actions or activities 
• Gains: net money generate from other activities 

2.4. Explanation of the used ration in the financial management domain 

In order to extract the financial information from the financial statement, ratio analysis is one of the popular one which focuses on financing, efficiency, profitability and other important information. In spite of the various advantages of the financial information statement, 

• Profitability Ratio

Profitability ratio is used to show in which way efficiently an organization generates value as well as profit for the shareholders. In terms of the views of the Fleckenstein and Longstaff, (2020), profitability ratio is the metric that is used to assess the capability of an organization to generate income in comparison to its balance sheet assets, operating costs and revenue.  

• Liquidity Ratio

This ratio is used to measure the capability of an organization regarding cover or pay off the short term debts without increasing external capital. In other words, the term liquidity is considered as a capability to convert assets into cash in a cheaper and quicker manner. As stated by Wijayaa. and Yudawisastrab, (2019), this ratio is mainly beneficial when they are used in a comparative form or process. 

• Efficiency Ratio

The efficiency ratio is mainly used to examine in which way an organization uses its liabilities as well as assets internally. In terms of the views of Saputra, (2019) an efficiency ratio can examine the repayment of liabilities, the general use of inventory and the quantity and usage of equity. Furthermore, this ratio has the use to examine and track the performance of the investment as well as commercial banks. 

• Solvency ratio:

This ratio is also popularly known as financial leverage ratio that is used to compare the debt level of an organization with the help of its earnings, equity and assets for the purpose of evaluating the probability of an organization staying buoyant over the long period of time. Debt assets ratio, interest coverage ratio, debt equity ratio are examples of the solvency ratio (Fleckenstein and Longstaff, (2020).

Section 3: Analysis of the provided template offered by the organization  

On the basis of the calculated data of the case study, an analysis of the business has been made in the following section.              

3.1. Profitability of the business 

In the financial year 2015-2016, profit of the organization has increased 127% from 18,987 to 43, 057 which is more than double. It implied that the organization is effectively managing its cost value as well as capable of providing services or goods at a price comparatively higher than the costs. Furthermore, to understand the financial health of the situation, net profit margin as well as gross profit margin both has been calculated and both values are highly satisfactory. After deducting the expenditure, the net profit margin is 43,067 which is quite high and also proves the strong financial health of the organization. The high gross profit value 81,126 reflects the effectiveness of the business in terms of the use of raw materials such as use of the raw materials, other supplies and labour (Fleckenstein and Longstaff,  2020). 

3.2. Liquidity of the business 

As already know from the previous section that the liquidity ratio is one of the pivotal indictor to measure the health of the business. Based on the calculation, the total liabilities of the business are lower than the assets which implied the company has a good financial health and highly capable of facing any kind of hardship which is one of the very common factors in the business place. The notable fact is that after deducting expenditure, the organization has a good amount of assets. In order to measure the liquidity ration of the business, quick acrid ration test and current ration test was made to measure the capability of the organization to pay short tern obligation. As per the result, it is cleared that organization successful to enhance the current assets to assure the present debt as well as other payables. 

3.3. Efficiency of the business 

The term is about making the best possible use of resources and an efficient firm has the potential to maximize the level of output by reducing the level of costs. In order to find it, on every purchase, the organization has earned more than the investment which is around 1.26£. This gap value reflected that the organization has enhanced its competitiveness by reducing the level of costs. 

Furthermore, in order to measure the level of efficiency receivable days as well as payable day has been calculated. Based on the data, it has been cleared that businesses need around 72 days to pay the invoices as well as bills to the financers, suppliers. Here, the value calculated on the annual basis indicated in which way cash outflow managed by the organization. On the other hand, a company needs around 54 days to collect a return from the consumer. This difference is also reflected in the efficiency level of the business (McLaney and Atrill, 2016).  

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

On the basis of the above analysis, it is cleared that financial health of the  organization is quite good but has the potential to enhance the level of performance in the long run by following the below mentioned strategies.

• Focus on the overhead cost reduction strategies:

In spite of the high level of profit, the organization has failed to manage the overhead cost that cleared from the increased gap of the overhead cost in the last one year. In order to reduce the overhead cost, the management of the organization should recruit strong professionals to handle the finances in an effective manner. In addition to that, organizations must focus on rents, investment, trying to focus on branding as they help to resolve the issue in an effective manner (Fleckenstein and Longstaff, 2020). 

• Leverage suppliers 

As per the suppliers, the management of the organization has failed to manage the cost of sales and it can be improved by investing on the leveraging of the suppliers. Basically, as per the study, it has been found that leverage suppliers have the potentiality to reduce cost by offering faster delivery or by offering quality products at the lower cost level.  

• Focus on all the elements of the marketing mix

The management should for enhancing the level of performance in the long run. 

Conclusion 

On the basis of the above analysis, it can be concluded that financial statements and ratios are important to determine the financial health of the organization. Furthermore, in order to make informed decisions, financial statements help to make productive decisions. Based on the calculated decision, it can be concluded that financial health of the case study based organization is quite good and has the potential to cover the resources in an effective manner .In other words, this ratio shows in which way an effective manner an organization generates value as well as profit for the shareholders.

Reference List

Costa, P.D.S., Pinto, A.F., Nunes, F.M. and Lemes, S., 2019. Comparability of accounting choices in the statement of cash flow: Evidence from Brazil. Contaduría y administración, 64(3).

Fleckenstein, M. and Longstaff, F.A., 2020. Renting Balance Sheet Space: Intermediary Balance Sheet Rental Costs and the Valuation of Derivatives. The Review of Financial Studies, 33(11), pp.5051-5091.

Khansalar, E. and Namazi, M., 2017. Cash flow disaggregation and prediction of cash flow. Journal of Applied Accounting Research.

McLaney, E. and Atrill, P., 2016. Accounting and finance: an introduction. Prentice Hill.

Rice, A., 2015. Accounts demystified: the astonishingly simple guide to accounting. Pearson UK.

Saputra, A.J., 2019. The Effect Of Liquidity Ratio Leverage Ratio And Activity Ratio In Predicting Financial Distress. Management and Economic Journal, pp.581-592.

Wijayaa, J.H. and Yudawisastrab, H.G., 2019. Influence of Capital Adequacy Ratio, Net Interest Margin and liquidity Ratio against Profitability Ratio. International Journal of Innovation, Creativity and Change, pp.268-277.

Appendix 

Business review Template

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