Financial Policy Formulation and Business Strategy: Financial Terms and Commonly Conducted Analysis

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Financial Policy Formulation and Business Strategy In this text, I concern myself with a number of financial terms and commonly conducted analyses. In addition to offering a concise definition of these terms, I will also examine how they are used in financial policy formulation and business strategy. Horizontal Analysis In basic terms, horizontal analysis helps us in the determination of how financial data has changed from one period to another. In that regard, this particular analysis could come in handy in the determination of whether the net income, expenses, gross profit, or even sales of a business entity increased or decreased during a specified time period. After identifying the behavior of specific financial statement items like expenses, managers can institute appropriate measures to either rectify or improve the prevailing financial situation of a company. Ratio Analysis Ratio analysis comes in handy in the determination of not only the financial health and stability, but also the performance of business entities. To begin with, profitability ratios are critical when it comes to the determination of how successful a firm or business entity is in profit generation. To further enhance the success of their firms, managers need to convince potential and existing investors that their firms offer the best returns. Indeed, in the words of Kimmel, Weygandt and Kieso (2010, p.701), "creditors and investors alike are interested in evaluating profitability." For this

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