FINANCIAL RATIOS AS AN AID TO MANAGEMENT DECISION MAKING

FINANCIAL RATIOS AS AN AID TO MANAGEMENT DECISION MAKING

BACKGROUND INFORMATION

Planning is one of the most important aspects in the management o a firm. It involves an appraisal of the past performance of the firm and a projection into the future. It is also related to existing strengths and weaknesses of the firm.

The strength must be understood if they are to be used for proper advantage and the weaknesses must be recognized if corrective action is to be taken. It is necessary for instance, to find whether inventories are adequate to support the projected level of sales or whether the existing level of investment in account receivable is an indication that the firm has lax collection policy.

Ratios analysis employs basic financial data taken from the analysis of financial statement (balance sheet and income statement which is the primary financial) reporting mechanism of an entity, both internally, and externally. An analysis of the financial information communicated by the statement should include the computation and interpretation of financial ratios.

Although emphasis is focused on outside users, such as credit and owners, management is aware, that their performance will be reviewed by those external partial and for other reason. For instance, the basic fianical statement are used to access the effectiveness of management in planning and controlling operations as well as for decision making.

Management also recognizes that the evaluation of past operation, as revealed by the analysis of the basic statement, represent a good starting pointing planning future operations and serves as important means of assessing past performance and in forecasting and planning future performance.

In other words, the aim of this term paper is to evaluate financial ratios as an aid to management decision – making, to find out if any, how financial ratios helps management in decision – making, to determine if accounting si actually of any use to management, to find the importance of financial ratios, to examine the extent to which management uses financial ratios information supplied to identify the problems inherent in the use of management information.

FINANICAL STATEMENT ANALYSIS

Financial statement analysis consists of applying analyst tools and techniques to financial statement and other relevant data to obtain to useful information. This information is shown as significant relationship between data and trends in those data assessing the company’s past performance and current position. The information shows the results or consequence of prior management decision. In addition, the information is used to make prediction that may have a direct effect on decision made by many users of financial statement.

Business entities may have objects and goals. However, the two primary objectives of every business are solvency and profitability, solvency is the ability to pay debts as the become due, profit ability is the ability to generate income unless a business can produce satisfactory income and pay its debts is they become due, other objective a business may have will never be realized simply because the business will not survive.

The financial statement that reflects a company solvency is the balance sheet the financial statement reflecting the company’s profitability is the income statement. The balance sheet, sometimes called the statement of financial position lists the company assets and liabilities and stockholders.

1.2 STATEMENT OF PROBLEM                      

Financial information provided in financial statements are useful in business decisions. However, it must be noted that financial statements are means to an and not an end in themselves. Thus the use of financial statements in decision-making is not always easy owing to the following problems:

1. In view of the summarized nature of the information contained in financial statements, they need to be analyzed and interpreted by means of financial ratios to enable management and stakeholders understand them and make well-informed business decisions.

2. Many users of financial statements are not knowledgeable about accounting ratios and how the ratios can be applied to financial statements to aid decision-making.

3. Despite the immense benefits of ratio analysis, there are a lot of weaknesses or limitations associated with its use.

In view of the above stated problems, this research is embarked upon to identify the proper use of financial ratios, and the roles ratio analysis plays in business decisions.  

1.3 OBJECTIVES OF THE STUDY

In consideration of the problems identified above, the objective of this research include.

1. To show how ratio analysis facilitates proper understanding of information contained in financial statements.

2. To show how ratio analysis aids business decisions.

3. To examine the techniques used in analysis financial statements.

4. To identify the usefulness of financial ratios in measuring and predicting the performance and financial position of a business.

5. To unravel the obstacles to the proper use of financial ratios in business decisions.

6. To suggest on ways to enhance efficient use of ratio analysis in decision-making.  

1.4 RESEARCH QUESTIONS

i. Is ratio analysis useful in evaluating and prediction the performance of a business as well as intensifying areas that regret improvement?

ii. Do you agree with the fact that ratio analysis facilitates proper understanding of information contained in financial statements?

iii. Is ratio analysis useful to management investors, shareholders and creditors in their business divisions?

iv. Does financial ratio helps to unravel the mass of truth hidden in financial statements?

v. Are there obstacles that affect the proper use of ratio analysis in business decisions?

1.5 SIGNIFICANCE OF THE STUDY

The significance of this study is that on its completion, the following benefits will be derived:

1. The study will help management of O. Jaco Brros. Ent. (Nig.) Ltd, Aba and others to know how ratio analysis can help them understand the financial contained in financial statements and enhance their business decisions.

2. The findings of the research and the supportive reference materials will be of immense help to students in tertiary institutions and other researchers to investigate further in the area of study.

3. It is hoped that the result of the research will facilitate optimal business decisions when the recommendations are complied with.

4. The study will encourage businessmen, investors, managers, and government authorities to appreciate quantitative techniques like financial ratios when making economic and business decisions.

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