Investment decision is the most important of three major decisions. It helps in making decisions regarding how much funds should be allocated to cash and how much funds should be allocated to inventory. It helps in day-to-day operations .More importantly; it also helps in making estimates regarding investments and disinvestments. It also helps in making future short term and long-term investments decisions. Second important decision is asset management decision. These decisions require finance managers are more concerned efficient management of current assets than with that of fixed assets. While operating managers are keener to operate fixed assets more efficiently.
Expenditures and Revenues Matrix
Punjab
City or County: PAKISTAN
Federal
State (province)
Local
Expenditure Item
School nutrition fund
Major expenditure on wheat, rice, cooking oil etc.
Major expenditure on basic food items for schools of state
Major expenditure items like water supply to schools, checking and distribution of basic food items.
Expenditure Item
Text book
Major expenditure on formation and printing of textbook.
Major expenditure on acquiring textbook from federal government.
No expenditure on textbook.
Expenditure item3
School maintenance
Not making expenditure on school maintenance.
Not making expenditure on school maintenance.
Major expenditure on purchasing material for school and making payments to constructor.
Revenue Item1
School nutrition fund
Donations, tax payer money, other revenue generating activities like concerts, cricket matches etc.
Amount given by federal government, donations.
Amount given by state, donations
Revenue Item 2
Textbook fund
Donations, tax payer money
Tax money raised by provincial government
No revenue sources
Revenue Item3
School maint. project
Tax money collected
Amount received from federal government.
Amount received from state government.
Major Roles
Federal government is primarily responsible for providing bread and butter to orphan houses and their schools while private schools and their hostels are themselves responsible for food and other basic necessities.
Provincial government fulfils the basic food necessities of those orphan houses and schools which are not covered by federal government.
Local administration takes the food supplies from the provincial government and provides it to different schools.
Federal government is also responsible for the making of curriculum and the selection of books.
Provincial government follows the guidelines of federal government and incorporates certain regional languages into the curriculum of schools run under the provincial government.
Local administration distributes text books in different schools of the area.
Federal government also provides funds to different states (provinces) in the country and also provides guidance to states in making their own curriculum.
Provincial government allocates funds to local administration.
Local administration is responsible for the construction and maintenance of schools.
(Expenditure Guideline Matrix, 2010)
Importance of Financial Decisions
There are three types of financial decisions:
1- Investment financing
2- Financing decision
3- Management decisions
Investment decision is the most important of three major decisions. It helps in making decisions regarding how much funds should be allocated to cash and how much funds should be allocated to inventory. It helps in day-to-day operations .More importantly; it also helps in making estimates regarding investments and disinvestments. It also helps in making future short-term and long-term investments decisions.
Second important decision is asset management decision. These decisions require finance managers are more concerned efficient management of current assets than with that of fixed assets. While operating managers are keener to operate fixed assets more efficiently.
Third important decision is finance decision. Financing decisions is concerned with the right hand side of balance sheet. It is mainly concerned with how the firm will fulfill its finance needs in the future. Firm decides whether shares or debentures will be issued and what will be dividend policy in the future. (American Management Association)
Tools of Financial Analysis
There are two primary types of information that helps in financial analysis:
1- Balance sheet information.
2- Income statement information.
First we will discuss how to analyze the balance sheet information. Apart from information from the face of balance sheet, there are different financial statement ratios, which help in analyzing the financial position of the company. Some of the ratios are discussed here.
1-Current Ratio
It shows a firm's ability to cover its current liabilities with its current assets.
2-Acid Test or Quick Ratio
It is same as current ratio in analyzing the liquidity but it concentrates on more liquid assets and it excludes inventories.
3-Debt to Equity Ratio
It appears by dividing total debt to shareholders equity. It tells us that what the ratio of shareholder to total debt is. Excessive debt ratio foretells the financial difficulties that firm may face.
4- Debt to Total Assets Ratio
It is derived by dividing a firm's total debt by its total debt. It reveals the importance of debt financing.
5- Coverage Ratios
One of the most important coverage ratios is interest coverage ratio. This interest coverage ratio appears by dividing Earnings before Interest and Taxes by Interest Expense. It tells the about firms ability to cover interest charges. (Brigham & Houstan, 2012)
Moreover there are certain activity ratios which tell that how efficient the management is carrying out its activity. There are certain activity ratios
1- Receivables Activity
It comes by dividing Annual credit sales by receivables. This ratio tells us that number of accounts receivable have been turned over into cash during the year.
2- Average Collected Period
It comes by multiplying receivables into days in the year and dividing the product by annual credit sales. It tells us that average number of days the receivables is outstanding before being collected.
3-Payable Activity Ratio
It comes by dividing the product of (account payable and days in the year) by annual credit purchases. This figure yields the average of firm's accounts payable.
(Plosser, 2002)
4- Inventory Activity
This ratio comes by dividing the cost of goods sold by inventory. This ratio tells us that how many times inventory is turned over into receivables through sales during the year. Higher the inventory turnover of the firm the more efficient the management of the firm is.
Profitability Ratios
Profitability ratios are of two types:
1- Profitability ratios in relation to sales
This ratio is derived by dividing net profit before tax to net sales. It tells us about the percentage of profit
2-Profitability in relation to investment
This ratio comes by dividing net profit after taxes by total assets. This ratio measures the rate of return on investment. The lower the rate of return on investment the lower investors will be attracted.
Similarly Return on equity on shareholder is another measure for measuring return on shareholders' equity. It comes by dividing net profit after taxes by shareholders equity. (Horne & Wachowicz, 10e)
Organizational Financial Analysis and Alternatives
Financial management provides different types of alternatives in making decisions. For example whether to lease a car or buy a car, whether to focus on short-term goals or on long-term goals, whether to issue shares or debentures, how much dividend should be issued, which of the investment opportunities are better, How to manage a cash etc. (NESSEN)
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