Financial and Strategic Management of Projects - Essay Example

The analysis of cash flows assists the CEOs and other top officials in ensuring that the investments made by the company is giving adequate return and company’s funds are not tied up in all the wrong ventures. Such an analysis cannot be made via Balance sheet analysis which represents the value of the assets on historical cost or the market value. From the perspective of a newly launched company, it is of prime importance to the management to ensure whether the operations are being conducted in the most prudent manner and are generating sufficient cash flows.

Cash stream is considered to be the lifeline in the financial stability of any organization, and cash flow analysis plays a significant part in cautious cash management planning References [1] “Importance of Cash Flow Statement” accountlearning.blogspot.com. Account, n.d. Web. 16 July. 2011. [2] “Importance of Cash Flow Statement” buzzle.com Buzzle.com, n.d. Web. 16 July. 2011. 2) Ratio analysis is a very accurate and reliable tool when it comes to analyzing the financial outlook of a bank.

The primary reason to conduct a ratio analysis is to quantify the results of the operations of a bank and compare them with that of the prior year(s) in order to assess different aspects of the financial feasibility. The ratios can be divided into various categories such as profitability, gearing and liquidity, each focusing on a different area of the financial outlook of the bank and highlighting its performance. These analyses form an integral part of the financial statement analysis, especially from the investors point of view, who always strive to invest in companies having strengthen and stabilizing financial ratios and representing an upward trend.

It is of great significance that the ratios must be benchmarked against a standard in order for them to possess a meaning. Keeping that into account, the comparison is usually conducted between companies portraying same business and financial risks, between industries and between different time periods of the same company. The liquidity ratio measures the company’s ability to pay its short term liabilities. The ratio illustrates that how quickly a company can convert its assets into cash and cash equivalent in order to pay off its short term liabilities [Jim Mueller].

The most commonly used liquidity ratio, the current ratio, which is calculated by comparing the current assets and current liabilities. The strengthened the current ratio the more ability the company has to pay its debts and short term obligations over the next 12 months. The gearing ratios and indicate the level of risk taken by a company as a result of its capital structure [gearing ratio]. These ratios are a great source of determining the level of financial risk to which the company is exposed and thus helps in reducing it to the optimum.

The debt ratio represents characteristics which is the opposite to that of the equity ratio. Debt ratio, which calculated by comparing the total liabilities to total assets, is a primary tool in determining the influence the company is under as a result of obtaining finances from sources other than equity. A lower ratio represents that the company is utilizing its equity in order to finance its operations and thus curtailing the financial risk