How can you apply financial analysis techniques to your own personal financial management?
Financial analysis techniques play a very vital role in financial management of a company or personal finances. They help business to make sound financial and investment decisions geared towards increasing the efficiency of a business as well as sparing business performances. Financial analysis techniques in personal financial management are very crucial in educating or informing a person how to use financial information effectively in order to develop insights and analysis of personal finances. Through these techniques one is able to come up with quality investment decisions then prepare a budget which is a plan which will act as a guide to achieving the laid financial objectives (Helfert, 2001).
There are various ways in which financial analysis techniques help an individual in his or her own financial management. First, financial analysis techniques help one in goal setting. The implementation of financial management starts with coming up with concrete goals for future financials. This acts as the guide towards the way to spend own financials in order to yield profit. The journey starts with making financial decisions on how one can invest his or her current funds for future benefits. Financial techniques such as discounted and non-discounted cash flow methods are used to make the best decision. Such techniques include profitability index, net present value method, payback period and accounting rate of return among others. It is through the decision made where and individual is able to set goals in order to enable him or her succeed in the financial investment decision in future.
When making the investment decisions, the above mentioned techniques are very vital in ensuring the best investment decisions are made. For instance, through the use of payback period technique, an investor is able to calculate the time taken by an investment to yield back the amount invested. This technique holds that the investment with the shorter period should be invested in. Nevertheless, the project whose net present value is high is selected relative to that with low net present value (Paramasivan & Subramanian, 2009).
In addition, the financial analysis techniques also play a vital role in helping own person financial management in budgeting. Budgeting is a financial analysis tools which consists of the future plan on how one wants to spend his or her finances. Budgeting helps an individual to predict the expenditures expected from the investment as well as the return expected from the investment. In so doing, it helps in enhancing efficiency use of the one finance. Generally, through the use of budget one is able to make predict the future and control the use of the finances in order to ensure efficiency (Helfert, 2001).
Moreover, financial analysis techniques help in predicting the rate of return one is expecting to get from investing his or finances. The aim of a business is to make profit for a given period of a time. When one invests his or her funds then he or she expects so certain amount of profit. There are various financial analysis techniques which are very crucial in enabling one to know the rate of return of his or her business. Such tools include the payback period, rate or return, return on investment and net present value among others.
What opportunities can you see?
Financial analysis techniques present one with various opportunities. First, they provide an opportunity to make the best investment decision of own funds. Through the use of discounted and non-discounted financial methods, one is able to understand which project is able to maximize profits in future. In so doing, it presents one with an opportunity to make choice of the best project.
In addition, financial analysis techniques help one to choose the best financial source for his or her business. This tools offer one with various financial sources and their advantages and disadvantages. In so doing one has an opportunity to choose the best source. Finally, these techniques present individuals with basic knowledge on how to budget their funds well in order to realize higher returns and reduce wastage of resources.
Helfert, E. A. (2001). Financial analysis tools and techniques : a guide for managers. New York: McGraw-Hill.
Paramasivan, C., & Subramanian, T. (2009). Financial management. New Delhi: New Age International (P) Ltd., Publishers.