Financial control is “the control of financial resources as they flow out or into the organization” (Gupta 27). Financial control is necessary because it ensures an organization is on the right path towards its business goals. As well, financial control is necessary because it helps managers take “corrective” measures whenever necessary. The basic information used for financial control includes budgets, financial audits, and ratio analyses. Financial statements are essential because they provide the best information for proper financial control. Managers use budgets to measure performance and “control standards” across different departments in an organization (Gupta 64). A budget helps leaders coordinate the available projects and resources.
This makes it easier to evaluate the financial performance of different units in an organization. The other “information” used for financial control is “ratio analysis.” This assesses the financial position of a business organization. Some widely used financial ratios include debt and liquidity. Managers also use audits for financial control. According to Gupta (79), “auditing is necessary because it verifies the accuracy of financial statements and the accounting procedures used.” Audits are necessary because they ensure the financial position of a business is under control. A financial statement also presents the income of an organization within a specific period. This document ensures the organization’s financial position is carefully controlled.
A financial statement is an important “profile” of a business organization. The profile gives a wider picture of an organization’s financial position. That being the case, financial statements play a significant role in any given business or organization. The two main financial statements include an income statement and a balance sheet. A balance sheet (also called financial position statement) is a detailed summary of an organization’s financial “balances” (Pfeiffer and Dyckman 21).
A balance sheet gives a detailed “snapshot profile” of an organization’s financial position. It lists the assets, equities, and liabilities of the organization “as at the end of the business year.” Managers can use the statement to examine the existing difference between the company’s assets and liabilities. The document makes it easier for the manager to understand the “net worth” of a business. This is what determines the financial position of the business. An income statement is a financial document summarizing the actual performance of an organization within a specified period (Pfeiffer and Dyckman 28). A business manager can use the document to establish whether the organization has recorded any losses or profits during its financial year. That being the case, the statement helps the manager examine the financial performance of the organization.
More often than not, the performance of organizations in the same industry is more or less the same. That being the case, a manager can compare an organization’s performance with the existing industry norms. The approach will make it easier to understand the major factors affecting the performance of the major businesses in the industry. After understanding the existing industry norms, the manager will understand the specific factors influencing the performance of different organizations in the industry (Gupta 72).
The identified norms will help the manager have a wider picture of the opportunities, challenges, forces, and barriers that affect the respective companies in the industry. After recording such norms in a specific industry, the manager will then evaluate and understand the current performance of the organization. The performance of an organization, therefore, depends on the profitability or attractiveness of its industry (Pfeiffer and Dyckman 89). This explains how a manager can compare an organization’s performance with the industry norms to understand its current performance.
Works Cited
Gupta, Ambrish. Financial Accounting for Management: An Analytical Perspective. New Delhi: Magic International Pvt. Limited, 2009. Print.
Pfeiffer, Glenn, and R. Dyckman. Financial Accounting. Cambridge: Cambridge Business Publishers, 2008. Print.