Since business organizations are considered risky, the management has a crucial role in assessing their overall future financial health before it is reflected in their annual financial statements. By doing this, they are able to prepare themselves for whatever action taken before making monetary and time expenditures in a way that may negatively affect it future growth for an organization that is sound financially is considered healthy and liquid.
First, any successful firm should set both long term and short term goals, strategies and operating procedures that will enable it to be able to compete more effectively in the market whether locally or internationally. For instance, a multinational organization standardizes, adapts or creates a different product to meet the market while a local company competes mainly through attractiveness of its packages and its marketing strategies (Koller 2005). In addition to this, an effective use of company assets such as replacement of old machinery with faster and updated ones is expected to positively improve its operations. These are some of the issues a management looks for when initially investigating the company’s position in the market.
Secondly, a firm that has an operational advantage, a lot has to be done In terms of market assessment to ensure that the market is dynamic enough to meet a rise in production so that there is an increase in future sales and returns. A market heavily supplied forces our firm to either lower its prices or reduce its production (Heyne 2002). A look into this encourages the firm to predict times when the sales are higher and when they dip low so as to ensure flexibility in production. This will also help it whenever it makes investment so as to either expand, merge or sale a part of its assets in order to meet market imperfections. Electronics companies such as Sony and Samsung are perfect examples here when they struggle against risk competing against other companies those sale similar products but at a lower price. A sound response to such competitors would influence their ability to stay in the market as they attract funds essential for future expansion strategies.
Any great organization goes into business with a profit making mind which in turn influences various important financial elements. The level of profitability has a strong influence on the firm’s ability to access credit which is essential for its growth. It also affects the value of its share in the stock market in a way that attracts or discourages investors (Pereiro 2002). The management therefore should compare the firms past financial records as upward sustainability in profit making is indirectly a sign that the firm has trend of better performance in future.
Moreover, a company that’s able to see higher sales in consecutive business cycles increases the shareholders equities due to a substantial increase in total assets the management must therefore come up with a way of future financial statement projections in order to be able to estimate future financial needs and how to access sources such as banks, the stock exchange markets through public offers and insurance companies. Companies with sound financial policies have a bargaining power with them when it comes to securing future investment funds while those whose records are shy face a bleak future as competition heightens (Pereiro 2002).
The above measures however are not usually available to investors when they want to buy into a company. They therefore rely on financial analysis to be able to predict a company’s future. Managers come in handy by computing financial ratios such as liquidity ratios and profitability ratios that will be used to analyze an organizations future performance (Lewellen 2004). These kind of information is then filed and published of quarterly and semi annually basis as required by law.
The extent to which the financial health of an organization is affected by fiscal and monetary policies on the effectiveness of either policy; the first part is the monetary policy where the government through the central bank uses monetary policy tools such as the open market operations where the government buys and sales securities to be able to increase its own investments. It may also lower or increase lending rates selectively to investors wishing to invest in the country in order to encourage or discourage investment. For instance an increase of lending rates discourages firms that would want extra funds for growth thus stagnation. Using fiscal policy, the government may increase business taxes in order to increase its expenditure. As a result of this, the organization is bound to apply different strategies such as increases in commodity prices, cut backs on the amount of labor employed and quantity controls to meet its increasing production costs (Heyne 2002). The firm however can be able cushion itself from such changes if it prepares itself by setting aside some amounts.
Therefore an organization seeking to survive any market chooses to foster its own growth or join forces with other companies if it’s able to analyze its own financial heath. Through internal growth, it should take care not to put itself in a position that might threaten its existence. On the other hand going into mergers with other organizations allows it to explore new market segments increasing its sales. All this is possible if the management knew their position.