Financial Management IP1

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Institution

Financial Management IP1

Horizontal analysis

Horizontal analysis plays an important function in financial policy and business strategy. Horizontal analysis is used to enhance investigations into a firm’s performance data thus facilitating managers to study the origin and development of specific information. Emphasis is mainly laid on how information on performance fluctuates from time to time (Needles et al, 2011). The analysis of horizontal data facilitates the examination of operating procedures impacts once they are developed and implemented by the personnel.

Vertical analysis

Vertical analysis is used mostly by accountants to make a comparison of specific performance indicators with numerical standards. For instance, the accountants may compare sales against the net income. In the formulation of a financial policy and business strategy, managers depend on this analysis to determine the financial value of different resources in an organization’s operation (Kozami, 2005). For instance, they can determine value of a production machine on the operations of the organization. The knowledge generated by this evaluation facilitates planning for long-term acquisition of assets and setting appropriate financial policies to ensure a successful posterity.

Raito analysis

Ratio analysis is the study of financial data using metrics (Moyer et al, 2012). Planners and strategists can isolate areas that need improvement in a business using a comparison of cooperate performance statistics to peers’ results. The same process can be used to pinpoint segments of the business that consume enormous amount of company finances. Ration analysis uses financial ration such as current ration and net profit margin.

Profitability ratios

Profitability ratios measure the effectiveness of the management in making profits from the company’s assets and the investments by the owners. The most frequently used ratios are net profit margin ratio, gross profit margin ratio, return on equity ratio, and return on fatal asset ratio (Moyer et al, 2012). Ratio help determined the productivity of the company and can be benchmarked again the industry to find out the general performance of the company and areas that need improvement.

Liquidity ratio

Liquidity ration us used to determine the liquidity level of a company. Liquidity is the ability of a company to meet its current obligation and levels of cash. Some financial ratios can provide critical information about a company’s liquidity ratios (Needles et al, 2011). Liquidity rations facilitates determination of the bill of payment, availability of financial resources for future investments, the company’s ability to pay dividends, determination of the cash balance which is the level of cash at the moment and the ideal level.

Asset utilization ratio

Asset utilization is used to determine the efficiency of a business in using its assets to make money. A firms incoming turnover, which is realized through division of credit sales by the amount receivable from clients, show the ability of a business to convert goods and services it sales onto finances or many that can server other purposes (Kazmi, 2008). Inventory turnover is also an asset utilization ration. It is a product of the division of cost of the products sold in a specific period by the mean value of the firm’s product inventory under the same period. Asset utilization is used by strategists to determine whether a business if being managed properly and how it is likely to perform in future by assessing its ability to sell its products make money on these sales.

Debt utilization ratio

This is the comparison between a firm’s total available debts with the total debit balances. It determines the companies credit score (Kazmi, 2008). Strategies used debt utilization ratio to determine the amount of debt a business is carrying the volume of available credit that is being utilized this ration can be used to determine long term viability for loans from fancier and ability to used the loans appropriately.

Benchmarking

Benchmarking is useful in improving performance and can be used to compare the performances of similar organizations (Kozami, 2005). It entails pinpointing areas the need improvement, setting benchmark indicators for quantitative evaluation of the achievements and assembling information for comparison to inform performance improvement. Strategist can use this process to find and strengthen weak points of a farm by comparing the firm to competing firms.

References

Kazmi, A. (2008). Strategic Management and Business Policy. New Delhi : Tata McGraw Hill Education.

Kozami, A. (2005). Business policy and strategic management. New-Delhi : McGraw-Hill Published

Moyer, R et al. (2012). Contemporary Financial Management. Mason, OH: South-Western, Cengage Learning.

Needles, B. E et al. (2011). Financial and Managerial Accounting. Mason, OH: South-Western Cengage Learning.