BMP3005: Importance Of Financial Management Assignment

 

Introduction

Financial management refers to an organisation’s function that is concerned over managing overall expenses, cash, credit and profitability of business entity. This process concentrates over effectively acquiring, allocating and utilizing funds to enhance profitability of the organization. Current report will discuss the importance of financial management and key elements of financial statement. It will also include interpretation of income statement, balance sheet and financial ratio of Greenway Landscaping. Moreover, it also discusses the concept of liquidity and measures through which company’s financial position could be enhanced.

SECTION 1

1A Significance of financial management

Each organization aims at optimizing financial management due to below mentioned reason:

Ø  Financial management ensures adequate allocation and utilization of financial resources. This function prioritizes critical area of the organization based on which accurate funds are allocated (Robert, Jennifer and Todd, 2023). This also ensures that funds are spending over necessary operations which aids in avoiding any type of wastage.

Ø  It also supports in maintaining the long term business stability through the means of effective financial planning, managing cash flow and avoiding any type of financial crisis (Kartawinata et al, 2021). This helps business entity in carrying out all the operations easily and thereby ensures higher stability.

Ø  FM also aids in taking data driven decision which supports the growth and development of organization. For example: FM includes taking pivotal financial decision such as budgeting and cost cutting which aids in the long term growth of business entity.

Ø  This concept also plays a crucial role in enhancing overall profitability of the company (Khasanah and Irawati, 2022). Effective financial management facilitates cost reduction, enhances sales and thereby boost overall financial position.

Ø  Financial management also ensures adequate compliances with the regulatory framework which reduces the scope of legal obligations (The importance of Financial statement, 2025). For example: Financial manager are involved towards ensuring adequate alignment with reporting standard, tax regulations and other legal requirement which avoid any type of legal issue and penalties.

1 (B) Key component of financial statement

Financial statement may be served as the formal records and reports of the firm’s financial activities that aids in identifying its overall profitability, liquidity and solvency position (Luna-Pereira and Caicedo-Rolón, 2022). There are four major component of financial statement which is as follows:

Income statement: It is one of crucial financial statement that defines profit, expense, gain and losses of the business entity over a period of time.

Balance sheet: It is the summary of total assets and liabilities that an organization owns which define overall net worth of the business entity (Indriaswari, Ulupui and Warokka, 2022).

Cash Flow statement: This presents the amount of cash that come in and out of the corporation within a particular time frame.

Equity statement: This is significant statement which indicates the difference in values of total assets and liabilities of the corporation.

Use of Income statement and balance sheet

Income statement helps stakeholders in identifying the firm’s efficiency in generating profits which in turn defines the long term stability of business entity (Farooq, Shah and Rasheed, 2021). This assists investors and stakeholders in assessing the firm’s ability in taking advantage of available opportunity based on which accurate decision could be initiated.

Balance sheet defines overall risk and uncertainties of firm which aids in predicting its financial health. This statement indicates total amount of assets, liabilities and equity owned by firm that ultimately aids in identifying firm’s growth prospect (Rao, 2021). Balance sheet also defines organization’s overall liquidity and solvency position which aids investors in taking accurate decision.

SECTION 2

2(A) Calculation and Interpretation of Income statement

Computation of Income statement

Interpretation

Gross profit: It has been identified that firm is earning a GP of 342000 pound which is computed by deducting cost of production from total sales. Firm is having gross profit margin of 72% which indicates higher profitability of business entity.

Profit from operation: Company is earning a profit of 157750 GBP after deducting all the indirect expenses. Firm is incurring expenses of £184250 which should be reduced as to boost profits.

Profit before tax: It has been assessed that organization is having interest liability of £5250 which is reducing overall profitability of business entity. However, finance cost support business entity in reducing its tax liability and thereby increases EPS for the shareholders.

            Profit for the year: On the basis of income statement, it has assessed that firm’s profit after tax is 122000 pound which is 26% of total revenue. This is an optimum condition as firm is able to attain the ideal ratio of 20% which denotes the long term growth potential of the organization.      

2 (B) Vertical analysis of Income statement and its interpretation

Vertical analysis of P&L

Interpretation of findings

            It has been identified that 28% of total revenue is used towards production of the goods. Moreover, firm‘s Gross profit margin is 72% which is attractive amount for investors and other stakeholders. Further, entity needs to pay 39% of profit towards indirect expenses and earn a net profit of 26%. It is an optimum financial position as higher net profit denotes that firm is controlling its cost which ensures the long term stability and growth.

2 (C) Computation financial position

For effectively identifying financial position of the business entity, assets, liability and equity of firm are evaluated which are as follows:

Assets: There are two different types of assets such as current and non-current. Firm is having non-current assets of 620500 pound and current assets of 161300 pound which used for funding operations, producing goods and drive overall growth.

Liability: Greenway Landscaping has current liability of £61150 and noncurrent liability of £175000. It has assessed that firm is having higher amount of assets as compared to its liabilities which defines the higher liquidity position.

Total equity: From the balance sheet, it has been determined that firm is having total equity of 545650 pound which comprises of share capital, retained earnings and reserves. This is higher than long term debt of the organization which indicates effective capital structure.

Moreover, firm is having working capital of 100150 pound which denotes organization’s ability in carrying out the routine task easily. From the above evaluation, it could be stated that organization is having adequate amount of assets, liquidity position and capital structure indicating high net worth.

2 (d) Calculation of financial ratios and its interpretation

Financial ratio

Interpretation

Below is in-depth financial ratio interpretation of Greenway Landscaping that aids in identifying overall profitability, liquidity, solvency and efficiency position of business entity:

Net profit Margin: It denotes that there is no change in net profit ratio in the two consecutive years indicating firm’s efficiency in managing its expenses. However, organization is incapable in attaining ideal ratio of 18-20% which in turn not an attractive situation for the investors. Moreover, stagnant profit result into losing significant growth opportunity and also defines the firm’s incapability in paying out all expenses in upcoming time and thereby hampers overall stability (Fridson and Alvarez, 2022). To overcome same, firm should focus on reducing operating cost by promoting automation and attaining economies of scale.  

ROCE: From the ratio analysis, it has been assessed that firm’s ROCE is 52% which indicates higher profitability position of the business entity. There is constant ROCE in both years which signifies firm’s efficiency in utilising its capital for generating profits.

Current ratio: It has been determined that Greenway Landscaping is capable in attaining ideal current ratio that denotes organization’s efficiency in paying out short term liabilities. However, organization’s current ratio is 3.61 which is not an optimum condition. High liquidity ratio denotes that firm has invested excessive funds towards current assets that are not generating adequate return (Tontiset, 2022). This situation also leads to losing diverse growth opportunity and thereby hampering organization growth. To overcome same, firm should adapt adequate inventory management system which helps in reducing situation of under or overstocking.

Quick ratio: Greenway Landscaping is having very high Quick ratio which denotes the firm’s ability to pay all its liabilities without using inventories. Organization is having quick ratio of 2.14 in the year of 2023 which has further increased to 2.16 in the current year. This situation occurs as organization has increased its cash balances by 50000 pound. This is not an adequate situation as company is having huge amount of ideal cash which could be used for earning higher profits (Hardiyanto, Ahma and Merawati, 2023). Manager should concentrate over investing cash in long term projects that support in managing quick ratio and also boost overall profitability.

Asset turnover ratio: Asset Turnover ratio of Greenway Landscaping is 2.5 which indicate firm’s ability in utilizing assets to boost sales. This also indicates that company is adequately utilising its resources which help in long term growth and stability of the business entity. For managing this ratio, manager should focus over increasing its sales and enhancing operational efficiency.

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SECTION 3

Meaning of liquidity

Liquidity presents the company’s capability to settle the entire short term obligation on timely basis. It also reflects firm’s efficiency in converting all the assets into cash without reducing its value (What is Liquidity, 2024). Liquidity also implies to ensuring proper availability of bank and cash balances and firm’s potential to utilize funds on timely basis.

Liquidity of Greenways Landscape

For understanding overall liquidity position of Greenway landscaping, current and liquid ratio has been calculated which is interpreted as below:

Current ratio: The firm is having current ratio of 2.64 which denotes that organization is attaining ideal ratio of 1.5-2. This situation signifies that company is having sufficient amount of current assets that could be used for paying out all the liabilities. This is good indicator for the creditors as it denotes that firm will able to pay all its credit by utilizing assets (Hashmi and Iqbal. 2022). However, Greenway is having higher current ratio that denotes unnecessary investment towards assets which leads to losing diverse growth opportunity.

Quick Ratio: From the calculation of quick ratio, it has been identified that firm is able to pay all its liabilities with the help of liquid asset. Quick ratio of Greenway is 1.88 which is higher than ideal ratio. On the other hand, this situation also indicates that firm is having huge amount of ideal cash that could hampers overall financial position of business entity.

From the above analysis, it could be stated that Greenway is having strong liquidity position which aids in managing economic downturns and also support in undertaking strategic opportunities that ensure higher financial stability. Following are various measures that should be adopted by Greenways Landscaping for boosting overall position:

Ø  Manager should focus over optimising inventory management which aids in reducing unnecessary investment towards goods (Hunjra et al, 2022). This will help organization in utilizing access funds towards high yielding investment and thereby boost overall return.

Ø  Further, it has stated that firm is having huge cash and cash equivalent that amount to 80500 pound which should be used for productive purpose. Manager should involved towards critically analysis and invest in diverse opportunities which help in earning higher profits.

Ø  Moreover, organization should focus over enhancing efficiency by reducing all the overhead cost. In this, firm should concentrate over adequate inventory management that aids in reducing wastage and warehousing cost which in turn enhances overall profitability (Afinindy, Salim and Ratnawati, 2021).

Ø  Along with this, Greenway should focus over improving marketing strategy which aids in attracting larger number of customers and leads to earning higher profits.

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Conclusion

By summing up the report, it has been identified that financial management support in adequate allocation of funds, aids in data driven decision and enhances overall profitability. Income statement, cash flow statement, balance sheet and statement of equity are crucial components of financial statement. It has been identified that greenway Landscaping is having higher current and quick ratio, ROCE and net profit that indicates adequate financial position. Further, Greenways should improve marketing strategy; invest in growth opportunity and reducs ideal cash as to enhance overall profitability position. 

References

Books and Journals

Afinindy, I., Salim, U. and Ratnawati, K., 2021. The effect of profitability, firm size, liquidity, sales growth on firm value mediated capital structure. International Journal of Business, Economics and Law, 24(4), pp.15-22.

Farooq, S.H., Shah, S.Z.A. and Rasheed, S., 2021. Impact of Financial Attitude, Financial Literacy and Parental Financial Socialization on Prudent Financial Management Practices: A Moderating Effect of Financial Well-Being among the Youth of Pakistan. Abasyn University Journal of Social Sciences, 14(1).

Fridson, M.S. and Alvarez, F., 2022. Financial statement analysis: a practitioner's guide. John Wiley & Sons.

Hardiyanto, N., Ahmar, N. and Merawati, E.E., 2023. Internet financial report and determinants of the quality of financial statements of non-profit organizations. Devotion: Journal of Research and Community Service, 4(1), pp.186-201.

Hashmi, M.A. and Iqbal, M.S., 2022. Impact of working capital management on firm profitability and liquidity: the moderating role of family ownership. Accounting Research Journal, 35(5), pp.676-697.

Hunjra, A.I., Mehmood, A., Nguyen, H.P. and Tayachi, T., 2022. Do firm-specific risks affect bank performance?. International Journal of Emerging Markets, 17(3), pp.664-682.

Indriaswari, I., Ulupui, I.G.K.A. and Warokka, A., 2022. Financial knowledge, financial attitude, and locus of control: Reviewing their influence on financial management behavior using financial literacy as moderation variable. The International Journal of Social Sciences World (TIJOSSW), 4(2), pp.431-443.

Kartawinata, B.R., Wijayangka, C., Akbar, A. and Hendiarto, R.S., 2021. The influence of lifestyle and financial behavior on personal financial management for the millennia generation (Study on college students in Bandung city, Indonesia). In Proceedings of the International Conference on Industrial Engineering and Operations Management (pp. 2957-2965).

Khasanah, U. and Irawati, Z., 2022, June. The Effect of Financial Literacy, Financial Attitude, and the Use of Financial Technology on the Financial Management of SMEs. In International Conference on Economics and Business Studies (ICOEBS 2022) (pp. 145-153). Atlantis Press.

Luna-Pereira, H.O. and Caicedo-Rolón, A.J., 2022. The importance of financial management for decision-making in the industry. Journal of Language and Linguistic Studies, 18(4).

Rao, P.M., 2021. Financial statement analysis and reporting. PHI Learning Pvt. Ltd..

Robert, C.H., Jennifer, L.K. and Todd, M., 2023. Analysis for financial management. McGraw-Hill Education.

Tontiset, N., 2022. Antecedents and consequences of effective preparation of financial statement: an empirical research of listed companies in Thailand. International Journal of Business Information Systems, 39(4), pp.516-531.

Online

The importance of Financial statement. 2025. Online. Available through: < https://www.lsbf.org.uk/blog/news/importance-of-financial-management/117410>

What is Liquidity. 2024. Online. Available through: < https://www.bdc.ca/en/articles-tools/entrepreneur-toolkit/templates-business-guides/glossary/liquidity>