Financial stature is best measure of a company

FINANCIAL MANAGEMENT (Part II)


The three main decisions the Financial Management must undertake are: (a) Investment decisions (b) Financing decisions and (c) Dividend decisions.

The investment decisions would entail the allocation and reallocation of capital and resources to projects, products/services, assets and the functional activities of an organisation. This form of capital budgeting is required to translate strategic planning into strategic implementation.

Financing decisions determine the preferred capital structure for the organisation and the different methods to raise capital. Capital could be raised by selling stocks, taking loans, selling assets or a combination of the three. The financing decisions for working capital must take into consideration both short-term and long-term requirements.

Dividend decisions determine the amount of funds paid out to the stockholders, compared with the amount retained in the organisation. Dividend issues are concerned with the percentage of earnings paid to stockholders, the consistency of dividends being paid over time and the repurchase or issuance of stock.

Financial ratios are "dip-stick" readings of an organisation's financial performance at any point in time. It's true value is not in the individual ratio itself, but when it is viewed relatively under three separate circumstances.


How has the ratio changed over time - this provides an avenue of evaluating historical trends. It can be observed whether each ratio has been increasing, decreasing or remaining constant over time.


How does the ratio compare with competitors - financial ratio analysis among direct competitions can reveal a more accurate scenario. For example, an organisation's profitability ratio is moving up over time, but it may be trending down relative to its leading competitor. This is a cause for concern.


How does the ratio compare with the industry - for example, if an organisation may appear to have an impressive growth ratio, it may pale when compared to industry norms and standards.


Financial ratios are grouped into five categories:

Liquidity ratio - measures an organisation's ability to meet short-term obligations.

Leverage ratio - measures the extent to which an organisation has been financed by debt.

Activity ratio - measures how effectively an organisation is utilising its resources.

Profitability ratio - measures the organisation's overall effectiveness on returns generated by investment and sales.

Growth ratio - measures the organisation's ability to maintain its position in the industry and economy.


The organisation's financial performance is not only dependent on the functions of finance, but is also influenced by the functional activities of the company; competitors, customers, creditors and suppliers/distributors; and the economic, political, social, technological, and natural environments as well.


By Bernard Thamboo, Business Times