Financial performance analysis and key financial principles help in the management of organizational finances. Financial performance analysis includes analysis and interpretation of financial statements. Consequently, it involves the undertaking of a full diagnosis of the profitability and financial soundness of the business. This analysis uses progr4amns and methodologies to analyze the finances. Financial principles provide standard guidelines on a company’s finances. They enable a company to understand how to manage finances and their values as well. Therefore, these principles are important for any organization’s success and wellbeing. Financial management is generally the main component that helps companies to grow.
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THE SIGNIFICANCE OF FINANCIAL PERFORMANCE ANALYSIS
Financial performance analysis is important since it helps to assess the operational efficiency and managerial effectiveness of the company. This, therefore, enables the company to know the performance of the managers within a company. Secondly, it helps in the analysis of financial strengths and weaknesses and how credit worth a company is. Hence, a company can secure loans from creditors in case they need to. Thirdly. With the help of key financial principles, the company can analyze the current position of their finances therefore they can know the methods in which they can improve cash flow. Lastly, it helps to study the reasonability of stocks and debtors that a company holds.
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KEY FINANCIAL PRINCIPLES FOR SUCCESS IN BUSINESS
There are six key financial principles in the success of a business. The first is the risk of return in which indicates that investors have to be conscious of both the risks and returns. This is because the higher the risk, the higher the return. Secondly, is the time value of money in which the value for money decreases as time goes by. Thirdly, is the cash flow principle which discusses the inflow and outflow of cash. Financial performance analysis helps to facilitate this principle. Fourth is profitability and liquidity. This principle is important from the investors’ perspective since it helps to ensure both profitability and liquidity. Fifth is the principle of diversity which helps to minimize the risk by building an optimum portfolio. Lastly, is the hedging principle which indicates that businesses have to take a loan from appropriate sources.
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