Financial Analysis is referred to as evaluation,computation and interpretation of analytical ratio's from financial statements to determine the financial trend regarding the organization in receiving effective management decisions. There exists different financial tools that are used by the finance managers which with Fund flow analysis,Cash flow analysis,Ratio analysis,Break-even analysis,Operating and Financial leverages. The Balance sheet reflects the true and fair view regarding the state of affairs regarding the business and only the read of Balance sheet is not sufficient in ascertaining the financial position regarding the company,there is a should have knowledge of the Cash flows and Fund flows underlying the Balance sheet. Therefore the sources and applications of funds serves the purpose. Further,the Leverages'both Operating and Financial helps in Capital gearing,Leverage means meeting the fixed cost or paying fixed return for employment of resources and fund.
It shall also be defined as the businesses own ability to use fixed cost assets or funds to enable more return of funds to its owner. Operating leverage takes location when the business has fixed cost that should be met regardless of volumes or cost of sales but when there is widespread fluctuation in sales which in turn leads to more high fluctuations within the operating profit it is referred to as Operating leverage. On the other paw Financial leverage is referred to as the company's ability to use fixed financial charges and indicates an effect on earnings created by the use of these fixed charges while creating capitalization plans. Therefore Financial leverage shall be regarded as tool in effective utilization of funds at a fixed cost with the hope of providing more increased return to shareholders. Where Q denotes many units sold; P denotes selling cost per unit denotes variable cost per unit; F denotes fixed cost; L denotes degree of operating leverage.
In planning the Financial structure and strength regarding the company, Cost-Volume-Profit analysis or in better known as Break Even Analysis is very important. It helps in ascertaining the relationship of cost and revenues to output. The analysis is generally presented in a Break even chart. Total sales is calculated =Total cost Total variable cost that shall also be known as the Break even Spot and the chart which shows this spot is known as the Break even chart. Ratio analysis was first financial tool developed that proved to be helpful in analyzing and interpreting financial statements.
Ratio analysis is that is why the process of determining and interpreting the numerical relationships based on about insurance statements. Frequent measurement in terms of ratio's helps to identify problems which wants to be solved, thus enabling correction. So sequential to attain sustainability, ratio analysis's very important. Some important ratio's are: Structural ratios, profitability ratios, working capital ratios, Miscelleneous ratios. An effective financial management can only be expected or judged by reviewing the record regarding the past as to sources and application of funds.
That is why the Fund flow analysis is thus a very important and the greatest vital tool within the hands regarding the financial management. It is a statement that is within the shape of condensed report showing sources and application of funds. This statement shows how the activities regarding the organization have been financed and how the financial resources have been utilized during the period; the statement shows the ebb and flow of funds into and out regarding the business known as cash inflow or outflow. Within the investment analysis spot of view Cash flow is a useful concept. It is one regarding the greatest important and analytical tool of a finance manager which helps him to judge the ability regarding the firm to meet the debt requirements, maintain standard dividends, to finance replacement and expansion costs.
The financial statement that summarizes the organizations assets, liabilities and shareholders equity at the end of a financial year. The Balance sheet gives an overview of what is the financial position regarding the business at the end regarding the financial year, has the business incurred profit or is running below loss. The balance sheet is one regarding the greatest important pieces of financial details issued by a company. Theincome statement, on the other hand, shows how many revenue and profit a business has generated over a sure period. Neitherstatement is better than the other - rather, the financial statements arebuilt to be used together to present a done picture of a company's finances.
An analysis of financial statements for the future is extremely valuable to organisation in planning the intermediate and long term financing regarding the firm. That is why financial analysis has many advantages and it is a very effective weapon within the armoury regarding the Financial Management which helps organizations to fight many adversaries. Financial analysis is compulsory in receiving effective management decisions: 1. How to manage the finances regarding the firm to attain strategic goals? 2. How to increase profitability? 3.
How to reach self sufficiency and break even point? 4. How to manage liquidity? 5. What is the greatest financial structure? That is why Financial Analysis shall also be called the Accountants Tool. In a nutshell, financial analyst assesses the organizations: Profitability Solvency Liquidity Stability The financial statements give as an analytical tool that help in computation of ratio's and cash flow measures and is a learning moderate that helps to evaluate, predict and reconstruct the economic reality that lay embedded in these financial statements. This story not only describes and deplores opaque financial reporting practices but gives practical suggested lines of action for these practices and to bring in organizational effectiveness.
Financial Analysis emphasizes on the managerial applications and adheres to standard techniques and technological developments. Analysis of financial statements shall also be done through details cutting edge designs mediums for example computers, This day very many many financial accounting packages have been specially drafted which give like a calculating tool for finance professionals. The use of Tally,Excel,Sap and different other ERP softwares for example are now gaining impetus to make sure that smooth financial analysis. Therefore to determine the trends within the organization,bring about sustainability,monitor profitibilty,efficiency and portfolio quality,identifying critical factors involved in financial unsustainibilty and removing them with the effective and standardized use regarding the financial analysis tool which not only gives a structure and basis for reporting but also recording all the financial transactions during a provided year. It is the basis for successful and sustainable micro-finance operations without which the MFI's commonly use 4 variations of financial statements-Balance sheet,Income statement,Cash flow or Fund flow statement,Portfolio report stop functioning.
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