The Role of Financial Management

The Role of Financial Management

Introduction

It is natural in every organization to protect all their finances and other resources. Part of the internal work of the organizational leaders is to formulate the appropriate strategy or technique that is fit for their managerial skills and knowledge. Due to different constraints came from the economic and financial crises, certain protocol or standard is needed to ensure that all their efforts will not be wasted. The call for a management of the financial resources is indeed became part of the organization’s traditional setting for the internal management.

Financial Management

The financial industry’s business and regulatory environment is dramatically changing, leading to the creation of new challenges and risks (NERA, 2009). This is an observation based on business analysts which pertains to the connection of changes and the formulation of the challenges and risks. Because of the growing interest of various industries on globalization, the revolution for changes appears. Alongside is the growth of the challenges that should be addressed by the organization. The involvement of the financial industry considers the idea regarding its management. Organizations should determine the capacity of their financial status to support the ongoing operation.

Various organizations are attempting to enhance their financial stability through the variation of the measurement and managing the risks. The business leaders seeks the best practices wherein they can implement in the entire system is the major problem that they can encounter. Seconded to this fact is the challenge to carry all the changes that may appear within or outside the organization. For sure, those challenges can create an impact in the performance of the organization as well as their financial strengths. There is only one thing that the business leaders should understand, every industry is different to the other and the application of the strategies depends on the nature of their industry. However, the organizations tapped the idea of market risk, credit risk, liquidity risk, and operational risk assessments. The exposure of an organization in the changes drives to the processes in effective risk management. As an ongoing procedure, the organizations are advised by the shareholders or the business analyst to take precautions before spending on a venture wherein there is no clear future. In this case, the review on the financial status and current reports should be implemented to address the capability of the organization in continuing the foreseen projects. Risk assessment is applied in the organizations to avoid the most common drastic situation which is the bankruptcy. The help of an investment is a strong alternative strategy. But the organization should also look on their capacity to return the capital if it was came from the financial sources. And in this is the crucial world of credit risk which another type of assessment of various risk in financial management.   

For Analysis

Through examining the organization’s financial records, the company’s net profit for the year was divided by the net revenues, in which is often expressed in percentage. This indicates on how effective a company at cost control. The higher the net profit margin is the more effective the company in converting the revenue into an actual profit. The net profit margin is a good way of comparing the companies which are in the same industry because they are subject to similar business conditions. It is also used in comparing companies of different industries to tell which industry is more profitable.

The Return on Equity indicates the rate of return in the stockholder’s equity. The increasing return on assets and equity is an advantage of the company to allocate more of their investments in any other proposed projects. Meanwhile, the debt-equity ratio measure’s the company’s financial leverage. If a company handled higher debt-equity ratio, the assumptions will be riskier, especially in times of rising interest rates. It is because due to the additional interest for the long-term debt. In contrast, the company’s good performance in the industry is good news to the company. This turnover in accounts payable only means that a company is paying off their suppliers in an average projected in the industry. The gross profit margin of the company has a poor indication. A gross profit margin indicates that every dollar generated in sales will help the company cover the operating costs and profit. And the ratio of the company in inventory only indicates that the company has a more chance to sell their products.

Conclusion

In the view of an investor: Predicting the future is what financial statement analysis is all about, but in the view of the management: Financial statement analysis is useful both as a way to anticipate future conditions and, more important, as a starting point of planning actions that will influence the future course of events.

References:

Brigham, E., & Gapenski, L., (1997) Financial Management Theory and Practice, Dryden Press 8th Ed. Pp. 35 – 57.

Focus Group, (2007) Credit Risk Management Industry Best Practices [Online] Available at: http://www.bangladesh-bank.org/mediaroom/corerisks/creditrisks.pdf [Accessed 21 February 2011].

NERA, (2009) Financial Risk Management, National Economic Research Associates, Inc. [Online] Available at: http://www.nera.com/image/BRO_Financial_Risk_Management_0909.pdf [Accessed 21 February 2011].

Pratt, T., (2007) S&P Completes Initial “PIM” Risk Management Review For Selected U.S. Energy Firms. Standard & Poor’s Ratings Direct. [Online] Available at: http://www2.standardandpoors.com/spf/pdf/events/InitailPIM.pdf [Accessed 21 February 2011].

Rao, A., & Marie, A., (2007) Current Practices of Enterprise Risk Management in Dubai, Management Accounting Quarterly, 8(3).

 

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