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busn602 discussion response 3

Hello,

I need three responses of at least 200 words each for the below students discussions for this week. Also in the bold below are the questions the students at answering.

Position1: Financial analysis leads to better decisions VS
Position 2: The resources to do a lengthy analysis (time, talent, information) are not always available.

This is a juxtaposition discussion question. Choose a side. If you choose the green side, find material to support your response…but you also have to find a way to resolve the counter-side on RED. If you choose the red side, find sources to help support your position…but you also have to resolve the counter-side on GREEN.

Student one:

Leading business is hard work and requires monitoring the different functions. Any leader or manager in a business does not typically work alone to know the outcome of every situation. A financial analysis is definitely beneficial for a leader to know what methods are working and what areas require more work. It can be lengthy but provides the necessary information to make decisions that will have a positive impact in the future rather than continuing a method that simply does not work for the company. In a financial analysis, adequate information comes back to determine the healthiness of the business.(Leonard, 2019) Within a financial statement there are cash flow, showing the inflow and outflow of money, liabilities, showing any business loans or credit cards, and asset and inventory, showing the inventory available or lack of inventory. (Leonard, 2019) Having this type of analysis will also help investors see the financial operations of a business.

While the cost and time of a financial analysis may seem bothersome, taking the necessary steps to get one completed is pertinent to the business’s success. There are simple steps that a small business can take to start monitoring their finances. The first one is to check the revenues to help understand the margins of revenue per employee and per customer. (Periu, 2019) Next would be the profits, gross profit margin, operating profit, and net profit margin all contribute to how the company can serve with the product and make money with the quality product.(Periu, 2019) Third would be the operational efficiency, which helps a business to manage the resources for the most profit.(Periu, 2019) This would include managing customer credit and inventory appropriately. Fourth thing to look at is the capital efficiency, showing the investors return and debt to investors.(Periu, 2019) As I mentioned earlier, investors want to see the financial analysis up front to ensure there is proper management in the operations and money of the business to lessen their risk. Finally, looking at the liquidity of a company can help determine the capabilities in creating enough profit for expenses along with growth.(Periu, 2019) This is important because not accounting for the necessary expenses can cause a business to run short on money faster in the long run. Taking small steps to manage the finances of a business is absolutely important to understand how stable the company is and will only help the growth of the company long term. It allows room to fix things before they lead to bankruptcy and provides information to compare the business against its competitors.

Resources:

Leonard, K. (2019, February 6). Advantages of a Financial Statement Analysis. In Chron. Retrieved from https://smallbusiness.chron.com/advantages-financial-statement-analysis-4124.html

Periu, M. (2019, June 25). 5 Key Elements of a Financial Analysis. In American Express. Retrieved from https://www.americanexpress.com/en-us/business/tre…

Student two:

Business decisions should be made based on the outcome that provides the greatest value to the company. However, no decision is made without assuming a level or risk. To reduce the level of risk, additional information and a financial analysis of the possible options is used (Cruz, n.d.). This financial analysis requires resources, such as time, talent and data collection that is not always available at the time the decision is required to be made. This juxtaposition between the need to do a thorough financial analysis and the availability of the resources required to complete the analysis pivots on the criticality of the decision (Messenger & Shaw, 1993). When a decision has a higher criticality, there is often less time to complete the analysis required to complete a full financial analysis. Regardless of the level of analysis completed by a company before a decision is made, most require some level of future looking assumptions and forecasting that will present a level of risk. With additional information and further analysis, it can be assumed that the assumptions will be more accurate, leading to better decision making.

If a critical decision is required on a timeline that does not permit the full analysis, or if the resources are limited for other factors, the decision should be weighed with the level of risk that is assumed. This risk assessment may require the addition of a cost contingency to the budget or using a more conservative sales forecast showing less favorable returns. In many cases, due to the combination of the value of the decision, combined with a high level of risk, senior management participation and approval of the decision may be required based on the company’s capital governance policy. Whenever possible, a company should complete a thorough analysis to ensure they make decisions that will provide the most value. When decisions must be made with limited time or inadequate resources, the level of risk assumed with each option must be applied to the decision and appropriate assumptions made to quantify that risk.

References:

Cornett, Adair, & Nofsinger (2015). Finance Applications & Theory 3rd ed. New York, NY: McGraw-Hill Irwin Melicher, R. W. & Norton, E. A. (2013). Introduction to Finance: Markets, Investments, and Financial Management, 15th edition.

Cruz, A. (n.d.). Financial Analysis and Valuation for Strategic Decision Making. Retrieved from https://www8.gsb.columbia.edu/execed/program-pages/details/1028/FAV

Messenger, S., & Shaw, H. (1993). Cost Analysis and Decision Making. Financial Management, 132-141. doi:10.1007/978-1-349-13080-1_13

Katarina Zager and Lajos Zager (2006). The Role of Financial Information in Decision Making Process. Innovative Marketing , 2(3)

Student three:

Financial analysis can lead to better decisions for firms. Financial analyses are versatile in that they can be applied to a large variety of potential situations and types of decisions. Financial analyses can highlight trends and patterns in cash flows, expenses, etc. These trends and patterns over time are documented and used to forecast future business (Meyer, 2018). Types of financial analysis including balance sheets, income statements, and cash flow statements display the information necessary to make business decisions. These types of analysis may educate business owners on how much money a company can borrow from external sources, the ability of a business to repay debts and creditors, and how much cash flow the business is generating. Financial analysis can allow companies to not only set goals, but to identify what stage they are at in accomplishing the set goals.

However, firms that may be suffering financial distress, are experiencing periods of low cash flow, or are small, newly-established small businesses may not have the resources to properly analyze their finances. Larger, more established firms would have substantial amounts of historical data to use in their analyses, in addition to a larger number of employees dedicated to financial matters. Larger firms would also provide more experienced employees that would be more educated in identifying and interpreting various financial patterns. It is also possible that regardless of what resources are available to a firm that the financial analysis doesn’t hold true. There has also been multiple occurrences of foul play including manipulating financial data. One large example was Enron, which lead to several laws and regulations being passed to hopefully prevent recurrence (Sherman & Young, 2016).

Meyer, A. (2018, November 30). Financial Analysis. Retrieved from https://www.inc.com/encyclopedia/financial-analysis.html.

Sherman, H. D., & Young, D. (2016, June 20). Where Financial Reporting Still Falls Short. Retrieved from https://hbr.org/2016/07/where-financial-reporting-still-falls-short.

 

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