How to uses financial tools

Section 3.0
Financial Planning and Control 3-1

   The basic functions of management include planning, coordinating, and controlling for growth and profit. Planning is directed toward the establishment of desirable future objectives and the formation of an organizational structure to be followed in their achievement. Coordination consists of integrating individual and group effort with overall growth and profit objectives. Controlling results from the evaluation of individual and group effort in terms of predetermined growth and profit goals.

   Fulfillment of these functions is essential to sound business management and successful operations. In small activities the manager may personally supervise every phase of operations and the basic functions of management may be performed with little recourse to accounting data. However, in larger entities, direct personal supervision is seldom possible and it is necessary to establish a chain of command from top management to the lowest supervisors. Under such circumstances, budgets and actual revenue and expense figures become an indispensable tool of management. Not only do these figures provide each level of management with relevant financial data, they also provide the basic facts required in planning, coordinating, and controlling for growth and profit.

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Section 4.0
Comparative Analysis of Financial Statements 4-1

   The analysis of financial statements consists of a study of relationships and trends which determine if the financial position, results of operations, and financial progress of the business are in line with the growth and profit objectives of management.

   The objective of any analytical method used to analyze a financial statement is to simplify or reduce the data under review to more understandable terms. The analyst first computes and organizes his/her data, and then analyzes and interprets them in order to make them more meaningful.

   Data is not an end in itself, but must be analyzed intelligently to aid in decision making by management. The promptness with which analytical data is furnished is of the utmost importance. It is not enough for management to know at the end of a year, or even a quarter, that costs are increasing more rapidly than revenues.

   The finance department of any organization must use cost reports, ratios and other analyses in presenting income statement data on a regular basis. Moreover, they must devise adequate methods of accruing items which may not be finally determined until the end of the accounting year or later, but which have a material effect on income.

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Section 5.0
Financial Statement Analysis Through Ratios 5-1

   Financial analysis involves the assessment of a firm's past, present, and anticipated future financial condition. The objective is to identify any WEAKNESSES in the firm's FINANCIAL HEALTH that could lead to future problems and to determine any STRENGTHS that the firm might capitalize upon. Financial ratios give the analyst a way of making meaningful comparisons of a firm's financial data at different POINTS IN TIME (Trend Analysis) and with OTHER FIRMS (Comparative Analysis). Specifically, financial ratios provide the basis for answering some very important questions concerning the financial well-being of the firm.

   " How liquid is the firm?

    • How efficiently is management managing its assets and debt?
    • Is management generating sufficient profits from the firm's assets?
    • How does the firm's management finance its investments?
    • Are the common stockholders receiving sufficient returns on their investment?
    • Are pro forma / budget statements in line with projected industry averages?
    • What do we need to do to accomplish our growth and profit strategies?

   Ratio analysis should be performed after pro forma and period statements are completed. Ratio analysis allows the firm to measure its performance against the industry and provides you with measurement tools to measure proportional relationships. We too often focus on dollar amounts when reviewing our financial statements. For instance, increased sales will not help your business if expenses are increasing at a greater rate. There are several types of ratios that managers can use which provide these proportional measurements.

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