Financial Decision Making Process within the Organisation Essay

Financial Decision Making Process within the Organisation - Essay Example Apart from generating profits from the shareholders, financial management also aims to maximise the profitability of the company to ensure a sustainable growth in future. Ensuring the sustainability of the organisation through proper reserve creation and re-investment of the profit amount is one of the crucial tasks in the realm of financial management. Financial Statement analysis and making investment decisions are two most crucial responsibilities of the financial managers. Financial Statement analysis includes the analysis of various ratios and financial statements like balance sheet and profit and loss account. A balance sheet discloses the financial condition of an organisation in a specific period of time. It mainly shows â€Å"what is owned by a business, what is owed, and the owner’s share (or net worth) of the business† (Langemeier & Klinefelter, n.d.). A profit and loss statement of any company discloses the organisation’s revenue and expenses for a specific period of time. Financial ratios assist in the evaluation the financial reports like balance sheet and profit and loss statement (Brigham, Ehrhardt, 2008). There are four types of ratios. These are liquidity ratios, solvency ratios, efficiency ratios and profitability ratios. Liquidity ratios are those ratios which measure the liquidity state of the organisation by evaluating the company’s liquid assets against its current liabilities. Financial leverage has certain important implications on the performance of the organisation. This mainly takes into account the long term liabilities against the total capital employed. This is also known as the ‘gearing ratio’ (Financial Times, 2009). A certain level of financial leverage can result in huge profitability; however, the company must be aware of the risk attached to it.