Importance of Financial Management

Importance of Financial ManagementINTRODUCTIONThe modern view in financial focal point accords a far greater importances to themanagement decisions and making policy. Today financial managers occupy key positions in altitude management areas and play dynamic role in solving tangled management problems.The main object ive of accounting is to provide the necessary t separatelying, which is expedient for the person within the organization i.e. owners, management, employees and in addition outside the organization i.e. investors, assentors, government, consumers, and so onFinancial accounting is concerned with record keeping directed towards the education of income statement and financial position statement. It provides information regarding proceeds and loss of the go-ahead and also its financial position as on that particular date. This information is helpful to management to control the major functions of the barter i.e. finance, administproportionn, production and mark eting, scarce details regarding operating efficiency to their lacking financial statements are generally concerned with the managements interestingness in future of the organization.Thus the financial implementation valuation involves the determination of the comp some(prenominal)s abilityIn mobilizing the monetary resource required for the business and utilizing the funds in the business.Therefore, the financial performance is concerned with the appraisal of the adjacentCapital formationCapital structureProfitability and wampum apportionmentWorking capital and liquidity managementFINANCIAL ANALYSFinancial synopsis is the process of determining the signifi earth-closett operating and financial characteristics of a soaked from its accounting and its financial statements. The goal of such(prenominal) compend is to determine the efficiency and performance of the firmlys management, reflected in the financial records and reports. This analysis will help us to measure firms liquidity, positivity and other indications that determine whether the business is conducted in a symmetrynal way or not.METHODS OF FINANCIAL ANALYSISThere are 7 methods of financial analysis. Such arecomparative degree statementComparative income statementComparative parallelism sheetCommon-size statementTrend analysisFund-flow analysisCash-flow analysisRatio analysis damage-volume do good analysis dimension ANALYSISFinancial statement plays a decisive role in setting the frame work of managerial decisions for the financial statements viz income statement and balance statement are prepared to help the management in fetching decisions. The Ratio analysis is the most power tool of financial analysis.importeeA ratio is simple arithmetical expression of the relationship of superstar member to another. Accounting ratios are relationships expressed in mathematical damage among figures which are connected with each other in both(prenominal) manner. Ratio analysis shows inter-relat ionship between the different items in the data.Current ratioCurrent ratio = Current assets / Current liabilitiesThe present-day(prenominal) ratio is metric by dividing the current assets by the current liabilities.Current assets include capital and those assets which can be converted into cash within course of study such as inventories, sundry debtors, marketable securities, loans and advances and prepaid expenses.Current liabilities are obligations maturing within a year, including creditors, bills earningsable, accrued expenses, bank overdraft, income tax obligation, loans and advances and provisions.The fellowships liquidity position was actually low in the initial years where as it is in truth high-pitched in the later years. affectionate (or) Acid test ratioQuick ratio = (Current assets Inventory) / Current liabilitiesThe ratio is really at the rate of current ratio and is found out by dividing the total current liabilities.From the analysis, it can be interpreted th at the companys liquidity position to pay for current liability is high. This result is higher interest equal on internetworking capital which affects the profitability of the firm.Debtors ageDebtors days = (Debtors / gross sales) * 365The liquidity position of the firm depends on the timberland of the debtors to the great extent. This resulted in higher balance in debtors for which company had to pay more interest charges which affected profitability of the company. This can be amend 3 times better as observed in the ratios of soundly doing firms. This will result in big reduction in interest charges as well as increase in profits. This possible solely through better debtors management and optimum credit policy of the firm.Creditor daysCreditor days = (Creditor / represent of goods sold ) * 365This ratio is a variation of the credit ratio and gives similar indications. It measures the portion of the firms assets that are financed by creditors. A very high ratio indicates a greater risk to creditors as also to the share holders under adverse business conditions. On the other have , a low ratio is for the creditors in extending credit.profit income ratio exonerate income ratio = (Net profit / sales) *100This ratio measures the rate of the net profit earned on sales. It establishes a relationship between net profit and sales in overall measure of the firms ability to turn drive of sales into net profit, this ratio also indicate the firms capacity to live adverse economic conditions.Gross income ratioGross income ratio = (Gross profit / Sales) *100The gross profit has been arrived by adding the closing bank line and subtracting the materials, scrape duty, wages and other manufacturing expenses to sales.This ratio reflects the efficiency with which management produces each unit of the product. When the gross margin in subtracted from 100% we get the ratio of cost of goods to sale.Return on equityReturn on equity = Net income / Share holders equityT he amount of net incomereturnedas a percentageof shareholders equity.Return on equitymeasures a corporations profitabilityby revealing how muchprofit acompany generateswith the money shareholders have invested.Net income is for the full fiscal year (before dividends paid to common stock holders but after dividends to preferred stock.) Shareholders equity does not include preferredshares.Cost of sales to sales ratioCost of sales to sales ratio = Cost of sales / Total salesThrough the manufacturing expenses percentage of company is less than the industry average the Cost of sales is slightly more than the industry. This can be, because of more depreciation charges or difference in excise duty. Therefore company has to produce goods by effective utilization of foxed assets to bring down the depreciation cost of sales. rail line derangement daysStock turnover days = sales / originThe higher the stock turnover the better, because money is then tied up for less time in stocks. A quicker stock turnover also means that the firm gets to make its profit on the stock quicker, and so the firm should be more competitive. However, it will vary between industries and so it is important to compare within an industry.Return on net assetsRONA = net income / (Fixed assets + Networking capital)Here, Networking capital = Current assets Current liabilities.It is the useful measure the profitability of all financial resources invested in the firms assets. It evaluated the use of total funds without any regard to the sources of funds. Higher the ratio more effective is the firm is victimization the pool of funds.Sales to net assets industriousSales to net assets employed = sales / net assetsHere, Net assets = Fixed assets + Current assets Current liabilities.This ratio is also called the earning power of the firm and represents the return of the funds. It indicates how well management has utilise funds supplied by the creditors and owners.Higher the ratio better is the position of the firm and more efficient of the management in utilizing funds, entrusted to it.CONCLUSIONSIn the overall of a business is to earn a satisfactory return on funds invested in it, consistent with maintaining a sound financial position.The position of the company according to ratio is satisfactory in the year 2008 2010. That means each year profit had been increased.BIBLIOGRAPHYFinancial management M Y khan P K Jainhttp//www.investopedia.com