Question

At what stage of financial management would you discover that the actual rates of returns are significantly lower than those returns forecasted?

Answer 1

Financial Management is a multi-stage process. The stages of Financial Management includes Planning, Budgeting (with Performance Indicators), Implementation and Auditing.

The organisation prepares the various projections (Examples: Sales, Investments, Financials etc.) based on many factors, such as demand for the product, past performance, competitor's strategy, growth perspective & obsolescence.

The key factor during the Financial Management process would be the "Cost of Capital and Rate of Return," based on which the organization would take necessary actions. Hence it is important to identify the variance between the returns forecasted and the actual returns.

Management would discover if the actual rate of returns varies with the budgeted returns only upon implementation of the plans (monitoring the implementation). Thus in the stage of Implementation and Auditing, the variance between the returns forecasted and the actual returns will be identified. Further, a necessary action would be taken based on the outcome of such a variance analysis.