Financial Control means appropriate utilization of the funds thus raised for the benefit, of the firm. 'Financial Control', observed "is the manipulation of a firm's financial resources in order to achieve the goal of the firm.'

Importance of FINANCIAL CONTROL

FINANCIAL CONTROL, If properly exercised, benefits, the organization in a number of ways:

1.it enables the management to know how much and how lone funds are required;

2. It makes the required funds available to enable the management to carry on the firm's activities.

3. It guarantees an effective utilization of available funds for the benefits of the organization

TOOLS OF FINANCIAL CONTROL

1. Financial Statements:

2. Ratio

i.Liquidity Ratio

ii. Leverage Ratio

iii. Profitability Ratio

iv. Activity Ratio

3. Budgets:

4. Cost Accounting and Variance Analysis

5. Cost-Volume-Profit Analysis

6. Internal Audit

RATIO ANALYSIS

Ratio analysis is a commonly used tool of financial statement analysis. A ratio is a mathematical relationship between one number to another number.

Classification from the point of view of financial management is as follows:

1. Liquidity Ratio

2. Activity Ratio

3. Solvency Ratio

4. Profitability Ratio

Liquidity Ratio

It is also called a short-term ratio. This ratio helps to understand the liquidity in a business which is the potential ability to meet current obligations. This ratio expresses the relationship between current assets and current assets

S. No. Ratio Formula Significant Ratio

1. Current Ratio = Current Assets / Current Liability 2 : 1

2. Quick Ratio = Quick Assets / Quick & Current Liability 1 :

Activity Ratio

It is also called a turnover ratio. This ratio measures the efficiency of the current assets and liabilities in the business concern during a particular period. This ratio is helpful to understand the performance of the business concern.

S. No. Ratio Formula

1. Stock Turnover Ratio = Cost of Sales / Average Inventory

2. Debtors Turnover Ratio = Credit Sales / Average Debtors

3. Creditors Turnover Ratio = Credit Purchase / Average Credit

4. Working Capital Turnover Ratio = Sales / Net Working Capital

Solvency Ratio

It is also called a leverage ratio, which measures the long-term obligation of the business concern. This ratio helps to understand, how the long-term funds are used in the business concern.

S. No Ratio Formula

1.Debt-Equity Ratio = External Equity / Internal Equity

2. Proprietary Ratio = Shareholder / Shareholder ' s Fund / Total Assets

3. Interest Coverage Ratio = EBIT / Fixed Interest Charges

Profitability Ratio

Profitability ratio helps to measure the profitability position of the business concern.

S. No Ratio Formula

1. Gross Profit Ratio = Gross Profit / Net Sales x 100

2. Net Profit Ratio = Net Profit after tax / Net Sales x 100

3. Operating Profit Ratio = Operating Net Profit / Sales x 100

4. Return in Investment = Net Profit after tax / Shareholder Fund x 100

COST-VOLUME-PROFIT ANALYSIS

MEANING OF COST-VOLUME-PROFIT ANALYSIS

Cost Volume Profit (CVP) Analysis is an analytical tool for studying the relationship between volume, cost, prices, and profits. it is an internal part of the profit planning process of a firm.

Thought formal profit planning and control include the use of budgets and other forecasts, the CVP Analysis provides an overview of the profit planning process.

The manager of profit-seeking organization usually study the relationship of revenues (sales), expenses(cost) and net income (net profit)

BREAK-EVEN ANALYSIS

The break-even analysis is the most widely known form of CVP analysis. The study of CVP relationship is frequently referred to as break-even analysis. Breakeven analysis is basically concerned with the determination of sales volume at which a company makes

neither profit nor loss.

MATHEMATICAL REPRESENTATION OF BREAK-EVEN ANALYSIS

Break-even Profit (in Rupees)=fixed cost/ P&V Ratio or = I-Marginal cost per unit/Selling price per unit

Break-even Point (in Units) =Fixed Cost/Contribution per unit

Where P/V Ratio = Contribution/Salez Ã— 100 and Contribution = Sales - Marginal

CALCULATION OF PROFIT/VOLUME RATIO (P/V RATIO)

This ratio shows the relationship between the value of sales and contribution / Salez Ratio Ratio.

This ratio is often expressed as a percentage.

P/V RATIO =CONTRIBUTION / SALES Ã— 100

The P/V RATIO May be calculated using per unit contribution and sales or total contribution and total sales.

the following formula may be used to the calculation to used to calculate P/V Ratio

P/V Ratio = CHANGES IN PROFIT/CHANGES IN SALES Ã— 100, where Sales - Cost = Profit

MARGIN OF SAFETY (MS)

A) MS = ACTUAL SALES - BREAK EVEN SALES

B) MS (IN RS) = Profit / P.V RATIO

C) MS (IN UNITS) = PROFIT / CONTRIBUTION UNITS

D) MS RATIO = MARGIN OF SAFETY SALES/ACTUAL SALES Ã— 100

BREAK - EVEN CHART

A BREAK EVEN CHART PORTRAYS A PICTORIAL VIEW OF THE RELATIONSHIP BETWEEN COST, VOLUME, AND PROFIT.

THE BREAK EVEN POINT INDICATED IN THE CHART WILL BE ONE OF WHICH THE TOTAL COST LINE AND TOTAL SALES LINE INTERSECT.

Example

From the following data compute the break-even point by means of a breakeven chart:

Volume of sales (units) 5000, 10000, 15000, 20000

Fixed cost Rs. 60000 for all levels of shares volume

Selling price per unit is Rs.8

Variable cost per units is Rs.5

Current sales: 20000 units.

Output Units	Variable costs	Fixed Cost	Total Cost	Sales
5000	25000	60000	85000	50000
10000	50000	60000	110000	100000
15000	75000	60000	135000	150000
20000	100000	60000	160000	200000