Financial management consists of several components that enable the financial manager to make decisions in regard to allocating funds, financing alternatives and to develop dividend policies in keeping with the organization's objectives.

Ratios

Ratios are used to compare an organization's performance against other firms in the same industry as well as against itself.

Types of Ratios

The profitability ratios measure profit margin, return on assets and return on equity. The asset utilization ratios measure receivable turnover, average collection period, inventory turnover, fixed asset turnover and total asset turnover. The liquidity ratios measure the current ratio and quick ratio that provide information on the ability to pay off short-term obligations. The debt utilization ratios measure debt to total assets, times interest earned and fixed charge coverage.

Analytical Tools

The ratio analysis enables an organization to measure its current condition and performance. Horizontal analysis determines patterns or trends from one year to the next. Vertical analysis shows the internal structure of an organization: the relationship between sales and income statements.

Uses of Ratio Calculations

The results of the ratio calculations enable the financial manager to determine the organization's performance in regard to similar organizations in the industry. Furthermore, the calculation demonstrates the organization's current financial situation, past financial situation and is applied to predict the future of the organization.

Conclusion

Financial management enables an organization to compare its performance against other companies within the industry. Financial management also enables an organization to evaluate its performance over time and whether or not it remains profitable.