Financial Training Manual

There are many items that you should be familiar with in the financial department at Strident Marks. The items that I will cover include financial institutions, financial markets, and valuation. Each of these items is important to our daily work environment. Financial institutions are intermediate companies that use the savings of others to provide loans and investments for different individuals (Gitman, 2006, p. 22). A financial institution is basically a way for Strident Marks to acquire the finances that we need to operate the business efficiently. A few of the major financial institutions are banks, insurance companies, and credit unions (Gitman, 2006, p. 23).

A financial market is "an organized institutional structure or mechanism for creating and exchanging financial assets" (Harvey, 2006). There are two major markets: money market and capital market (Gitman, 2006, p. 23). Money markets are used for interim loans that are secured by bonds, Treasury bills, and many others (Harvey, 2006). The capital market is the opposite of the money market, where the loans are long-term (Gitman, 2006, p. 23).

Valuation is completed through ratio analysis. There are many different types of ratio analysis that the finance department performs. These include cross-sectional, time-series, and combination analyses which combines both the cross-sectional and time-series analysis (Gitman, 2006, p. 54-56). The following chart is a representation of what each type of ratio analysis is used for.

Type of Ratio AnalysisComparison Use

Cross-Sectional

Evaluates where the company stands compared to another company (Gitman, 2006, p. 54).

Time-Series

Evaluates company performance over a given amount of time (Gitman, 2006, p. 55).

Combined

Evaluates "the trend in the behavior of the ratio in relation to the trend for the industry" (Gitman, 2006, p. 56).

There are many cautions that should be considered when performing a ratio analysis

-Ratio analysis can show us potential problems, but does not definitely state there is a viable problem (Gitman, 2006, p. 56).

-One ratio cannot provide the company with enough information to judge its performance (Gitman, 2006, p. 56).

-All ratios should be completed using data from financial statements that are completed at the same time or it will results in invalid results (Gitman, 2006, p. 7).

-Always use reviewed financial statements or the ratio results will be invalid (Gitman, 2006, p. 57).

-Always use data that has been acquired in the same way or the ratio results will once again be invalid (Gitman, 2006, p. 57).

-Data needs to be adjusted so the results are not distorted by inflation (Gitman, 2006, p. 57).

As you can see there are many items to consider when completing ratio analysis.

There are five categories that financial ratios can be included are "liquidity, activity, debt, profitability, and market ratios" (Gitman, 2006, p. 57). The following chart is a representation of what each ratio measures.CategoryMeasurement

Liquidity Ratios

The ability to pay back money when it is due (Gitman, 2006, p. 58).

Activity Ratios

How long it takes for accounts to be converted into inflows and outflows (Gitman, 2006, p. 58).

Debt Ratios

Risk the company has according to debt (Gitman, 2006, p. 62).

Profitability Ratios

Profitability of the company (Gitman, 2006, p. 65).

Market Ratios

Company's market value in terms of current share price (Gitman, 2006, p. 69).

Each of the ratios is important to our company. The ratios inform the company on many important aspects that we should be aware of. Ratios assist the company in making both long-term and short-term decisions. If we do not make these decisions efficiently the company will fail.
References

Harvey, C.R. (2006). Campbell r. harvey's hypertextual finance glossary. Retrieved March 3, 2007, from Duke University Web site: http://www.duke.edu/~charvey/Classes/wpg/bfglosf.htm

Gitman, L.J. (2006). Principles of managerial finance (11^th ed). Boston, Massachusetts: Pearson Addison Wesley