BMP3005

Applied Business Finance

The concept and importance of financial management and the processes

businesses might use to improve their financial performance

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Introduction
The key financial statements are discussed and explained, with the right description on
methods to apply the ratios in financial statements. Also, the research will evaluate the
firm’s performance, sustainability, efficiency, and productivity using the financial
statement and computations.

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Section 1:
One of the most critical components of every organization is financial management.
You'll need exceptional money management skills to start up or even operate a
successful firm. The strategic planning, organizing, directing, and managing of financial
activities in an organization or institute is known as financial management. It also entails
applying management ideas to an organization's financial assets, as well as contributing
to fiscal management. Consider the following goals:
Financial management, according to Startup Plan (2018), is the process of planning
resources, setting up cash reserves, and tracking income and expenditure in order to
achieve an institution's goal. Borrowing, investing, and dividends are all required for a
specific period of time.
There are two types of investment strategies: cash flow and finance. Every business's
success hinges on its financial management. It's a strategy for reaching goals and
objectives. The financial planner evaluates the organization's performance by properly
allocating resources, procuring goods, and administering the business. It improves
operational efficiency by guaranteeing that cash is available when and where they're
needed.
Financial planning is the process of calculating an organization's capital requirements
and allocating them. There are several major purposes in a financial plan, including:
 Figuring out how much money you'll need
 Organizing and structuring the capital;
One of the most significant areas of financial management is financial control. Its main
role is to define whether or not a business is fulfilling its objectives.
Financial decision-making refers to the organization's investment and funding. This
department makes choices about how the company raises money, whether new shares
should be sold, and how profits should be dispersed.

Benefits of financial management

 Aids financial planning for businesses;
 Aids in the planning and acquisition of money for organizations.
 Aids organizations in making the best use of and allocating cash they have
received or gained;
 Aids businesses in making important financial decisions.
 Assists businesses in increasing their profits;
 Enhances the firm's or organization's overall value
 Economic stability is ensured.
 Employees are encouraged to save money.

Section 2: Main financial statements and use of ratios:

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The financial statements are divided into four groups. Balance sheets, income
statements, cash flow statements, and statements of shareholders' equity.
Balance Sheet
The assets, liabilities, and shareholders' equity of a firm are all detailed on a balance
sheet.
Assets: A company's assets are valuable items it possesses. This usually indicates
they can be sold or used to manufacture items or deliver services that can be sold by
the company. Plants, trucks, equipment, and inventory all fall under the category of
assets. It also includes intangible assets, like trademarks and patents, that can't be
handled yet nevertheless have value.
Liabilities: A company's liabilities are the sums of money it owes to third parties. This
can encompass everything from funds loaned from a financial institution to launch a
new product to rent for the use of a facility, money owed to suppliers for goods, salaries
owed to employees, environmental cleaning expenditures, and taxes payable to the
government. Obligations to supply services or goods to clients in the future are also
included in the definition of liabilities.
Shareholders’ equity: The term "capital" or "net worth" refers to the value of a
company's stockholders. It's the money left over after a business sells all of its holdings
and pays off all of its debts. The company's shareholders, or owners, are entitled to the
money that is leftover.
The basic financial equation is used to draw up a company's balance sheet. Companies'
assets are listed on the left section of the balance sheet. Their liabilities and
shareholders' equity are listed on the right side. Assets are sometimes at the top of
balance sheets, followed by liabilities, and finally shareholders' equity.
Statements of income
Bragg claims that the income statement summarizes the tax year's trades, expenses,
and earnings. As it displays an individual's operational performance, it is typically
viewed as the most important of the financial statements. The income statement
describes a company's financial position over a specific time period. A month, half of a
year or a year is commonly used as a timescale; however, partial cycles can also be
utilized. This is the most crucial profit statement, and it's the one that's most likely to be
disseminated within a business for executive review. The broad classifications of
income statement facts are as follows:
Earnings
Gross profit margin
Value of products sold
Costs for selling, monetary, and organizational purposes
Revenue from the organization (gross margin - selling, general and administrative
expenses)
Additional income and expenditures

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Dues on profits
Net loss or profit

Statements of cash flow

A statement of cash flow is the financial statement published by a firm that shows how
money shifts from one side of the company to the other. It focuses mostly on funds
generation and cash-using activities like services, mergers, and funding. Although the
cash flow statement is often overlooked in favor of the income and balance sheets, it
can be utilized to spot trends in economic activity that aren't visible in other financial
statements. It's especially useful when the announced profits and the cash flow
generated by actions aren't in sync. The statement of cash flow shows the outflows
and inflows of funds across the monitoring period [CITATION Wha19 \l 1033 ]. This can be
a useful comparison to the income statement, especially if the amount of profit or loss
stated on the income statement does not properly show the cash flows of the
company. When financial statements are published, this declaration could be made to
third parties. There are three types of cash flows in the statement:
Operating activities: The activities that generate revenue for a company are known as
operating activities. Indicators of business operations include money collected and
disbursed for retail purchases, fees, remuneration, fines, lawsuits, seller and loan
invoicing, and salaries.
Investment activities: All payments made to purchase long-term properties, as well as
the income received from their sale, are included in investing methods. Investment
procedures include buying and selling fixed assets, as well as buying and selling shares
in other companies.
Financing activities: Activities affecting the ability of the enterprise or repayments are
known as financing operations. Selling and repurchasing company stock are two
examples.
Statement of Retained Earnings
Bragg claims that over the course of an accounting cycle, the statement of profits
matches changes in the accounts receivable record. The statement begins with the
accounting period's starting balance, then adds or subtracts factors such as sales and
dividend payments to arrive at the deferred revenue balance at the end of the period.
The retained earnings statement shows the change in equity over the course of the
fiscal quarter. The structure of the statement varies, but it may include stock sales or
repurchases, dividend distributions, and changes due to recorded profits or losses. Due
to the fact that it is usually only involved in the certified financial statement set, this is
the most widely used financial statement (Bragg, S. 2019). The calculating form for the
statement is as follows:

Earnings held at the end=capital gains + income – pay-outs

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Carlson claims that financial ratio analysis is a statistical tool that business analysts use
to obtain relevant information about the performance of the company, liquidity position,
productivity, stability, sales, and estimated value. Major organizations can use financial
ratios to get information from a company's balance sheet, financial statement, and cash
flow statement. The knowledge gained by financial ratio analysis is key to both internal
management and external parties, such as creditors, who are simply looking to
establish the organization's existing robustness. Financial ratios can be extremely
beneficial.
Ratios
Financial ratios are divided into six categories, each of which is frequently employed by
executives in their research. There are 15 financial parameters that a corporate director
and internal analysts can use to assess the company's economic health under these six
categories. Only if financial ratios can be compared to something else are they useful.
Each ratio must be connected to data from the company's previous time periods. They
may also be connected to data from other companies in the same industry:
 Liquidity, 
 Solvency
 Productivity
 Coverage
 Profitability
 Market value
Hayes claims that ratios of liquidity are a form of monetary metric that evaluates a
debtor's ability to pay back current liability concessions while still seeking additional
capital. Current ratios, quick ratios, and networking resources ratios are used by liquid
assets to assess a company's ability to pay off debts and liabilities while maintaining a
high level of security. Liquidity ratios are widely used to measure the ability to pay short-
term liabilities and commitments in crisis.
The Corporate Finance Association claims this to be the case (n.d.). Efficiency ratios
are important indicators of a company's ability to deliver the resources it needs to make
profits, such as cash and inventory. The ratios compare costs to profits gained,
essentially demonstrating what kind of returns or value a company may expect from the
money it spends on operations.
Amount indicating a company's readiness to pay its debts. It is computed by dividing the
sum of short and long term liabilities by the sum of the corporation's post-tax tangible
gain and impairment and reporting the resulting proportion. A high solvency ratio
indicates a stable company, whereas a low ratio indicates the opposite.
CFA Journal reports on this A coverage ratio is a metric that measures a company's
ability to repay debts and meet financial obligations. The Corporate Finance Institute
claims this to be the case. Profitability ratios are financial indicators used by
investment analysts to measure and analyze a company's potential to create value in
relation to sales, balance sheet resources, operational costs, and capital invested
over a certain time period. They demonstrate how frequently a company makes use of
its assets to generate profit and gain investor esteem [ CITATION ROS202 \l 1033 ].

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Market valuation ratios can be used to estimate the financial condition of publicly traded
companies and to determine whether stocks are overvalued, underpriced, or fairly
valued.

Section 3.1:
v. The calculations are made on page number 13
vi. Income statement Included in appendix 1
vii. The balance sheet is in appendix 2

viii. Profitability ratio of 2016

Gross profit margin=4276
Net profit margin= 226%

The metrics gave a favorable conclusion while examining the corporation's

profitability, indicating that the organization properly uses its data on capital for
revenue and, as a result, the corporate executes in perfect situations, guaranteeing its
existing success.

The following are the liquidity ratios for the year 2016:
Current ratios= 54349/37928=222:1
Quick ratio=84349-28571/37928=147:1

Liquidity ratios show how well a company is able to pay off its debts, and the figures
show that the company has the funds it needs to meet its financial responsibilities. A
higher current level, according to the indices, implies that the business is making it
much easier to repay loans.

Ratios of efficiency for the year 2016

Sales revenue from capital employees = 189,711/115,719= 1,63
189,711/649 292 = 189,711/649 292 = 189,711/649 292
The analysis of efficiency ratios demonstrates that the company efficiently selects its
staff, indicating organizational success. Furthermore, a company that prioritizes its
employees is way more successful, resulting in increased profits [ CITATION Lan17 \l 1033
].

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Section 4: Expenditure minimization is one of the most successful approaches to
improve your situation, as per Riviera Finance. (2017). Examine every part of your
business for ways to save money on items, machines, and facilities. Examine your
savings and insurance premiums to see if you can achieve reasonable prices
[ CITATION Riv17 \l 1033 ].

Conclusion
The research looked at the importance of financial reporting in the market and how to
use financial statement analysis to improve a company's success.

References
Braggs, 2019. What are the Four Basic Financial Statements?. Accounting Tools, 28
April.
https://www.accountingtools.com/articles/the-four-basic-financial-statements.html
CARLSON, 2019. What Market Value Ratios Can Tell You About a Company. SMALL
BUSINESS, 13 Dec.
https://www.thebalancesmb.com/what-is-financial-ratio-analysis-
393186#:~:text=Financial%20ratios%20are%20useful%20tools%20that%20help
%20business
CFI, 2021. Efficiency Ratios?. Efficiency ratios, 1 May.
https://corporatefinanceinstitute.com/resources/knowledge/finance/efficiency-
ratios/#:~:text=Efficiency%20ratios%20are%20metrics%20that%20are%20used%20i
Lang, 2017. How to read nonprofit financial statements: a practical guide. 3rd ed. New
Jersey: Hoboken.
https://capitadiscovery.co.uk/bolton-ac/items/192319
N.d, 2021. Coverage Ratios – Definition, Types, And Examples. CFA, 1 May.
https://www.cfajournal.org/coverage-ratios/
N.d, 2021. Profitability Ratios?. Ratios, 1 May.
https://corporatefinanceinstitute.com/resources/knowledge/finance/profitability-ratios/
Riviera, 2017. How to Improve Your Business’s Financial Position. 10 Ways to Improve
Your Company Financial Position, 10 May.
https://www.rivierafinance.com/finance-blog/how-to-improve-your-businesss-financial-
position/
ROSEMARY, 2020. What Is Financial Ratio Analysis?. BUSINESS FINANCE, 11
November.

https://www.thebalancesmb.com/what-is-financial-ratio-analysis-393186

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What is the definition of financial management? What are its functions and significance?
[Online] You can find it at:
https://startupaplan.com/what-is-financial-management/amp/

Appendix
1. Income statement

Appendix 2: Balance Sheet

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Appendix 3: Business review

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Appendix 4: Notes

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Calculations made:

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