USING FINANCIAL RATIOS TO ACCESS ORGANISATIONAL PERFORMANCE (Term Paper Sample)

Topic Student’s name Professor’s name Course title Date Financial planning is the process of evaluating the capital required in an organization and determining its competition. A financial plan helps in framing policies regarding cash control, determining the requirement of capital as well as capital structure in an organization. It helps the finance manager in ensuring maximum utilization of the available finance resources to optimize returns on investment. A financial plan is similar to an accounting statement in that it gives similar finance statements as in accounting including profit and loss, balance sheet and cash flow. However, as opposed to accounting statement which looks into the past performance of the business, financial plan gives a future forecast of the financial state of the business based on past results. The financial plan is useful to both to shareholders and to investors. It provides shareholders with projected future growth of the venture and this can help them in making appropriate decisions. Through the financial plan, investors are able to weigh the chances of future growth in a business. A financial plan includes the following; 1) Sales forecast 2) Projected expense budget 3) Cash-flow statement 4) Income projections 5) A projected balance sheet to account for assets and liabilities 6) Break-even analysis The following is the financial plan for Health Management Associates for the next 3 years; Year 1 Year 2 Year 3 Total revenue($ millions) 5809.54 6429.73 7220.37 Gross profit($ millions) 4840.02 5387.03 6050.5 Operating income($ millions 131.1 156.68 145.76 Net income($ millions) 176.16 204.8 190.36 Total assets($ millions) 6709.75 7803.85 8200.45 Total liabilities($ millions) 5537.14 6383.0 6544.82 Total equity($ millions) 1169.63 1417.88 1652.66 Another way of analyzing financial statements is the use of different kinds of financial ratios. Ratios give the relative size of one number in relation to another. After calculating a financial ratio at a given period, this ratio is compared to another value calculated the previous year to see if the organization is making progress as expected. (Financial ratios: How to use financial ratios to maximize value and success for your business; Bull,2008). The financial ratio used by analysts to evaluate the financial condition of a company is the Debt-to-equity ratio. It is an indicator of the relative proportion of a company’s equity and debt used to finance the company’s assets. This ratio also represents the ability of a company to repay its obligations. It is calculated as follows; Debt-to-equity ratio=Liabilities/Equity An optimal Debt-to-equity ratio of 1 implies that Liabilities=equity. A high Debt-to-equity ratio implies that the company is not able to raise enough cash to settle its debt obligations. The ability of an organization to meet its financial obligations as they come due represents its liquidity. It is a measure of how easy an organization can convert some or all of its assets into cash. Many investors wish to know the liquidity of companies they may wish to invest in prior to making investments. There are a number of financial ratios that can be used to measure the ability of an organization to meet its financial obligations. These are; 1) Current ratio- this ratio compares the level of current assets to current liabilities. It measures the current ability of the company to pay both short-term and long-term obligations. It is given by; Current ratio=current assets/current liabilities A ratio less than 1 implies that the company has more liabilities than assets and it will not be able to pay its obligation at that given time. A ratio greater than 1 implies that the company can settle all its obligations without necessarily going bankrupt. 2) Quick ratio- This is similar to the current ratio but excludes inventory from the current assets. ...