FINANCIAL MANAGEMENT

Financial Management

Financial Management

Answer 1

Ratios

Ratios are comparison tools designed to analyze the management, profitability and financial structure of your business. Ratios help to quickly identify strengths and weaknesses of your company regarding its autonomy and financial independence, performance, solvency and liquidity.

These indicators (ratios) are constructed on the basis of information restated from the perspective of financial analysis that is to say with the least possible financial difficulties of interpretation.

The ratios are ratios of figures that allow managers to analyze business performance.  The ratio is expressed either as a quotient (e.g. 0.72) or as a percentage (e.g. 72%).

Ratio method

The financial analysis of a company is to study and interpret financial condition. Good management must be based on sound analysis, an understanding of the company and thereafter a rapid detection of problems.

The financial analysis needs of certain measuring instruments to achieve its objective. The analysis by the ratio method is one of the most used tools.

However, a ratio must be meaningful and address the critical business issues. It should also be comparable and should not be isolated so that would give a correct sense of the situation and the financial performance of a company. This means that an isolated form of ratios will not represent the true picture of the financial performance of the company. These are always needed for more than one year enabling the analysts to compare them. In other case, there must be present some other indicators of the financial performance of the business that may be compared with the ratios.

The ratios are very useful for managers in that they allow:

To measure company performance over time;

To evaluate the company in terms of profitability and solvency;

Identify existing problems and provide solutions.

Significance of Ratios

A careful examination of your financial ratios is one way to assess your financial health and to find out how it could be improved. These ratios are used to make comparisons between different aspects of firm performance, or how the company ranks within an industry or region. They reveal fundamental indices, for example, if you have taken too much debt, accumulated too much inventory or if you do not cover your receivables quickly.

Classification of Ratios

Ratio analysis is the starting point for developing the information, which can be classified into 4 groups as follows:

Liquidity Ratios: measure the ability of short-term payment of the Company to pay the obligations coming due.

Activity Ratios: measure how effectively the company is using the assets employed.

Profitability Ratios: measure the company's ability to generate profits.

Coverage Ratios: measure the degree of protection to creditors and long-term investor. Within this group, the most used is the ratio between liabilities and total assets or equity to total assets.

Answer 2

The financial objectives of any firm differ on the basis of its business operations and structure. However, the primary mission and values in terms of finance remains the same. The main objectives of any organization relates to the profitability, ability to attain liquidity in the short term and financial stability.

Businesses operate for the purpose of attaining handsome profits and ...