FINANCIAL MANAGEMENT ANALYSIS

Financial Management Analysis

Financial Management Analysis - Assignment

Introduction

There are many reasons due to which companies fail, the major reason is wrong decision making regarding investments. It is very important to take the right decision of when to invest, where to invest, how to invest, and whether to invest or not. When an organization plan to invest its capital in a new venture it needs to make planned decision as a huge amount of capital is required for investment and these types of decisions are very important in generating future cash flows and growth of business. Another reason for making planned decision is capital is a very limited resource. Capital can be obtained from two main sources, Debt and Equity. Both of these sources of finance have a cost. For debt financing the companies have to pay interest and for equity financing the companies have to pay dividend to the share holders. A company should make sure that it can cover its cost and after that make profits.

A company should carry out the feasibility of the project by following steps. Firstly the manager should have a good idea and realise the need for the project. Secondly, it should look for suitable project. Thirdly it should identify and consider alternatives. Fourthly, it should carry out financial analysis (Capital Investment Appraisal).Fifth step is to analyse alternatives and identify feasible alternatives. Sixth step is to choose the project that should be undertaken. Seventh step is to monitor the project along with the rest of the organization and lastly carry out post completion audit.

Capital budgeting is process of planning and managing long term investments of the company. Through this process the organization managers seek to identify, develop and evaluate investment opportunities that may be profitable for the company. It can be said that this evaluation is done by checking if the cash flows that generate investment in an asset exceed flows required to accomplish the project. A poorly executed capital budget can bring very serious consequences for the company, just as a capital budget done correctly can bring many benefits. Investments in fixed assets for the purpose of growth or renewal of technology usually involve very significant disbursements in addition to these assets are acquired with the intention of staying for periods of time, often extending for five years or more. A bad decision to invest in these assets can mean the difference between a successful business for several years and a company struggling to survive. The evaluation of the project is not sufficient to consider the flows that generate, nor the expenditure required to carry it out. Also to be considered the likelihood of cash flows, and the period in which flows present. In other words, the financial evaluation of the project should consider the magnitude, timing and risk of all relevant cash flows related to the project.

Companies use capital budgeting techniques in order to determine whether investment in long term projects such as new machinery, building a plant and other investments are ...