Financial Analysis and Control Systems - Essay Example

FINANCIAL ANALYSIS AND CONTROL SYSTEMS Introduction Working capital management is one of the most significant tasks for all business managers and financial analysts. Business must strike a precise balance amid assets management and liability management for effective perpetual operation (Titman, 2002; p. 59). Efficient working capital management is essential in the sense that cases of bankruptcy can be avoided because the business is able to balance needs and obligations. Therefore in understanding the significance of working capital management, focus is shifted towards its importance in budgeting and investment appraisal.

Importance of Working Capital Management in Budgeting There are various ways of developing working capital and working capital management. These starts with the simple duty of assessing the expenditures, revenue sources and the pending debts on daily, weekly, monthly or yearly basis. It is followed by planning before hand on how to strike a balance between these variables. To provide more cash for working capital management there is need to lower the costs of production whilst putting at level the sales revenue so as to increase the profit margin.

Problems related with short term working capital management can be dealt with through trading short term liabilities for non-current liabilities and investing the amount allotted into the generation of revenue to pay off the long term debts (Masoud, 2007; p. 195). Working capital management helps in the process of controlled disbursement during budgeting. The bank which acts as a safe custody of the business is entitled with the mandate of giving a frequent report that gives the amount of disbursement that will be charged to the clients’ accounts.

This prior information helps the business to plan accordingly on how the accounts can be executed and the manner in which they can be executed. Management of working capital helps in the process of reconciliation of accounts. This is true especially when balancing checkbooks which involve intensive monitoring and evaluation to establish the business actual accounts. Thus most businesses and banks develop mechanisms which enable the business to make a list of checks issued, received and cleared.

At the end of the trading period, a bank statement is issued to show how effective the process of budgeting has been achieved. Thus the process of reconciliation can be very critical in budgeting providing a benchmark for the business future budgeting and expense estimations. Importance of Working Capital Management in Investment Appraisal Investment appraisal is a type of technique for making decisions putting in mind the cost and the benefit of venturing in the non-current assets in a stated period of time.

A business with higher assets investment would find it more efficient to obtain better financing at different levels. Thus the board of directors which is mandated with crucial decisions concerning the business has to find better ways of utilizing the available resources to produce the best outcome. Research reveals that most decisions made by supervised management have a tendency to provide a strong impact on where to cut down on costs of capital for investment which eventually affect the organizational performance (Irala, 2006; p. 214). One of the most vital sources of effective practices of management in a business with high internal financing is the use of debts.

Management with efficient knowledge of working capital management has solid facts on how to use debts in its operations to improve on the process of profit generation. Studies also show that some businesses keep the prices of stocks low during initial public offer to help in generation of profits upon the trading of the stocks. Growth of the firm over a period of time owed to the process of effective capital management can be characterized by proper implementation of working capital decisions that enhances profit generation.

Application of efficient practices in investment appraisal such as proper analysis of the net present value and the internal rate of return boost the organizational performance. Capital and financial evaluation are very crucial in jumpstarting the business to establish comparative techniques that can be used in boosting the business performance (Anand, 2001; p. 61). Efficient working capital management is essential from the perspective of liquidity and profitability. Funds might be tied in idle assets if investment appraisal is not conducted effectively (Teruel & Solan, 2005; p. 123). Thus to eradicate this scenario the business must improve on working capital management by increasing the liquidity levels and disposing off assets that might seem to be less useful or putting them into efficient use within the business such as hiring the assets.

Assets that have depreciated or those that may have passed their useful lifetime can be easily identified through the process of investment appraisal hence help the firm in finding the best way of extracting benefits from the assets. Bibliography Anand, M 2001, “Working Capital Performance of Corporate: An empirical survey”, Management Accounting Research, Vol.4 (4), pp 35-65. Irala, R.L 2006, “Financial management practices in Jarell, G.A. and A.B Poulsen 1989. The returns to India, Fortune J. Intl. Management, (3):1-9 Masoud, M.

S 2000, Effects of Stakeholder Attributes and Managers’ Values on Stakeholder Salience – A Study of Managers and Selected Stakeholder Groups in the State Owned and Privatised Firms in Tanzania a PhD Thesis, Umea, Sweden BA-Publications 2007:195 Teruel P and Solan P 2005, “Effects of Working Capital Management on SME Profitability”, Working Paper series: Spain Titman, S 2002, “The Modigliani and Miller Theorem and Structural Adjustment in Korea, November and the integration of financial markets,” financial management journal, 5-1