Using Financial Tools
Many tools and techniques are available for examining an organization's performance. The financial tools on which this chapter focuses include financial ratio, financial projection, break-even analysis, and some variation of these tools.
All of these tools are useful for managers. They increase the understanding of the cause-and-effect relationships in the organizations, those identify trends, and those which allow comparison with other organizations.
In general, financial analysis involves (1) converting data into ratios and percentages that indicate relationship and trends and (2) comparing the relationships and trends with standards of performance.
Particularly, typical applications of financial tools include:
* Assessing the performance of a product, subsidiary, division, company, industry or competitor
- Determining capital requirements
- Lease/purchasing analysis
- Product pricing
- Acquisition and divestiture analysis
- Management evaluation
- Predicting business failure
- Deciding whether to make or by a product
- Capital expenditure analysis
- Bond ratings
Financial tools aid the manager by providing an independent and objective means of supporting decision making. They are often used successfully to structure alternative choices.