Question

Discuss the types of decisions that management may develop from financial analysis

Answer 1

The types of decisions that management may develop from financial analysis are:

After looking at the financial statements , the management has to decide on the :

• Dividend decisions: Once an organisation starts to generate profits. The management has to decide, weather to distribute the profits as dividends to to retain the profits within the company and exploit further growth opportunities.
• Investment decision: The mix of equity and deb is called the capital structure of the firm. A firm should maintain an adequate level of debt and equity in the capital structure. A firm has many ways to raise capital, raising capital through debt has many risks involved. Raising the level of debt, beyond he optimal level that lead to bankruptcy. A sound financial decision will lead to a capital structure which will maximise the value of the firm and minimize risk. It creates maximum value for shareholders.
• Liquidity decision; the liquidity position is very important fro a firm. A firm should invest a certain amount of funds in current assts o maintain the trade off between liquidity and profitability . In case liquid assets have become unprofitable, they should be disposed off. Sufficient investment should be made in the current assets, if it is found to be insufficient.
• Business decisions: By looking into the balance sheet, a manager can take business decisions. By looking into the accounts receivables that has not yet been collected a manager can change the collection process and change credit policies for the faster collection of receivables.

• The data in the income statement helps inform decisions that control operating expenses and cost of goods sold to keep profit margins intact.

• The cash flow position of the company cannot be manipulated, so the cash flow statement helps to take the management take major decisions based on the true picture of the organisation projected by the cash flow statement. A drop in the operating cash flow positions indicates red flags that the company should make changes to the debt, inventory and overheads.