Question

Okay, we know entrepreneurs take risks... risks for the sake of profit.  Clearly, business owners do their best to get the best (highest) return on investment.  This comes in the form of profits (money), employee recruiting efforts, employee retention strategies, training/coaching, and overall business development.  All of this requires money and business owners need to decide the most efficient allocations of their financial and human capital resources.

Discuss how a business can measure and manage its financial resources.  What are the primary distinctions between the following financial analysis tools?  Discuss each item along with how and when a business would use these reports.  Profit & Loss Statement (Income Statement)Balance SheetStatement of Cash Flow

Be sure to include at least 2 practical examples to support your thoughts and ideas.

Answer 1

There is a specific feild of study that is related to management of finanace of an organization that is known as finanacial managemenet. It entails discipline related to capital structuring decsions, investement/budgeting decisions, dividend decision related management. Working capital management is also part of it.

A business can manage its financial resources by undertaking various analysis for each separate sub field of financial management. For example under capital structuring, business has to decide from which sources (equity or debt) and in what proportion it has take finance and for such decision tools like debt equity ratio, number of theories like walker and modi-miller tec can also be considered. Under budgeting business decides how to allocate the finance for various inouts and for that many tools are available such as net present worth, buy pack period, internal rate of analysis, benefit cost ratio etc. Similarly for dividend management, where it has to decides how to distribute profit, tools like dividend policy of company, grwoth rate etc ha sto be considered.

Profit and Loss is an account of all expenses and revenue that a business earns and depicts whether during a finnacial year it has earned profit or loss. If expenses exceed revenue its loss otherwise profit. This profit(or loss) then gets credited to balance sheet which is an ccount of finacial status of the business, not of a singlye year, but of till date. Balance sheet represnets what liabilities and assets the business hold at a particular poinit of time.