The term Financial method or Financial tool refers to any logical method technique to be employed for accomplishing the following goals:
1.Measuring of effectiveness of firms actions and decisions.
2.Measuring the validity of the decisions regarding accepting or rejecting the projects.
Following are the important financial tools used.
1.Cost of capital-Cost of capital helps the finance manager in deciding about the sources from which the funds are to be raised. They have to opt for the cheapest source.
2.Trading on Equity: Trading on equity is another tool for increasing the return to equity shareholders.
3.Capital Budgeting appraisal-It involves the use of different methods like net present value, profitability index
4.Ratio analysis: Different ratios help solving several purposes
5. ABC Analysis: Cash management models, debtors turnover ratios etc help in effective management of current assets.
6. Fund flow analysis and cash flow analysis: This helps in knowing whether the funds have been procured from the right available sources and have been deployed in the best possible way.