Context-Aware Applications - Guide to Cloud Computing for Business and Technology Managers - page 502

control is an essential part of the overall financial management process.
Establishment of precisely what the financial constraints are and how the
proposed operating plans will impact them are a central part of the finance
function. This is generally undertaken by the development of suitable
aggregate decision patterns like financial plans that outline the financial
outcomes that are necessary for the organization to meet its commitments.
Financial control can then be seen as the process by which such plans are
monitored and necessary corrective action proposed when significant
deviations are detected.
Financial plans are constituted of three decision patterns:
1. Cash flow planning : This is required to ensure that cash is available
to meet the payments the organization is obliged to meet. Failure to
manage cash flows will result in technical insolvency (the inability
to meet payments when they are legally required to be made). Ratios
are a set of powerful tools to report these matters. For focusing on
cash flows and liquidity, a range of ratios based on working capital
are appropriate; each of these ratios addresses a different aspect of
the cash collection and payment cycle.
The five key ratios that are commonly calculated are
• Current ratio, equal to current assets divided by current liabilities
• Quick ratio (or acid test), equal to quick assets (current assets less
inventories) divided by current liabilities
• Inventory turnover period, equal to inventories divided by cost of
sales, with the result being expressed in terms of days or months
• Debtors to sales ratio, with the result again being expressed as an
average collection period
• Creditors to purchases ratio, again expressed as the average pay-
ment period
There are conventional values for each of these ratios (for exam-
ple, the current ratio often has a standard value of 2.0 mentioned,
although this has fallen substantially in recent years because of
improvements in the techniques of working capital management,
and the quick ratio a value of 1.0), but in fact these values vary
widely across firms and industries. More generally helpful is a com-
parison with industry norms and an examination of the changes in
the values of these ratios over time that will assist in the assessment
of whether any financial difficulties may be arising.
2. Profitability: : This is the need to acquire resources (usually from
revenues acquired by selling goods and services) at a greater rate
than using them (usually represented by the costs of making pay-
ments to suppliers, employees, and others). Although, over the life