Finance is a management of money. Management of finance is very important task in business management. The two important aspect of finance are time value of money and rate of return. Finance is integral activity to the successful operations of firms and markets. Finance management should be done in an effective way to survive in today’s business environment. Financial management is concerned with investment decisions. Investment decisions can also be investment in fixed assets or investment in current assets or working capital related decisions or decisions regarding accepting a new project. It can be financial decision like raising of finance thorough different sources. Dividend decisions are also financial management decisions. Estimating capital requirements, capital composition determination, choices of sources of funds, investment of funds, disposing surplus funds, management of cash and financial controls are different functions of financial management. Financial management requires full attention of the financial advisor or manager as it is concerned with the successful survival of the business.
Investment appraisal is a part of capital budgeting. Investment appraisal is a technique where investment proposals are evaluated with the help of different techniques like average rate of return, internal rate of return, net present value and payback period. After analysing investment proposals, the best alternative is selected among all.
Ratio analysis is a technique to evaluate the financial performance of the entity. Ratio analysis is an analysis of the information contained in the financial statement of the company. There are different types of ratios analysis like profitability ratios, solvency ratios, efficiency ratios, liquidity ratios. It is based on accounting information. It’s a useful tool to interpret the financial information of the entity.
Sensitivity analysis is also called “what if” analysis. It takes into account different situations which can prevail in the market. If enterprise is planning to produce a new product then sensitivity analysis can be conducted like what if the price of the product falls below the predetermined price, what if the price of material rise above the standard price.
Trend Horizontal / Vertical Analysis
Vertical analysis is a method where each amount of the financial statement is reported as a percentage of another item. For example, each item of balance sheet is reported as a percentage of total assets. Vertical analysis of profit and loss statement is reported as a percentage of total sales. While, horizontal analysis is conducted by comparing the current year data with past year’s data.
Projection of financial statements
Financial performance of the entity is projected each year for the next year. Projection of financial statement depends upon different situations of the organisation. Projection of financial statements is a summary of various components of financial statements like revenues, expenses and indicates net income of the year. Projected financial statements are an important tool for the performance of company.
Valuation technique refers to valuation of different kind of assets, shares, goodwill, business, liabilities and other important components of the business. Valuation is estimation of value of something. Valuation technique is important in many aspects of business like merger, acquisition, amalgamation and de-merger. There are different methods of valuation of different components.