CHAPTER V
SUMMARY, CONLUSION AND RECOMMENDATIONS
5 1 Summary
Managers are responsible for the business health of their
firms. It is their responsibility to avoid financial mistakes. The financial
side of the business can be managed by the use of appropriate financial
management strategies just as the physical side of the business is managed.
Financial ratios, which measure the relationship between two
financial items or categories, are useful tools in this process. Ratios are
like symptoms in that they do not tell you what is wrong, but rather guide your
thinking and analysis into areas where problems may exist. They facilitate
comparisons among unwieldy numbers, among various parts of the business as well
as among different industry firms. When analyzed over time they can provide an
early warning system to detect emerging trends in the financial condition of
the business.
In the first chapter, the researcher tried to
indicate the background of this study, the problem statement where the
researcher tried to show how the no use of accounting ratio can mislead
management of each company while depending solely on financial statements in
decision making; at this level objectives of this study are stated as well as
its hypothesis.
In the second chapter, the review of what other
researcher have so far done in this area of accounting ratios and decision
making has been given. Different views on ratios and decision making have been
advanced and discussed to provide theories upon which hypothesis are tested,
In the third chapter, the methodology aspects adopted
by the researcher in carrying out this research is defined. Study variable were
determined, sampling techniques used were also discussed; data collection also
was defined for this research to collect both primary and secondary data.
Primary data were collected using interview as quantitative oriented research,
secondary data were collected using financial statements of 5 years period 2003
- 2007.
In chap ter four, the findings obtained by the
researcher were found basing on theories put forward by a number of researchers
in chapter two. The use of accounting ratios can guide decision making. It is
worth noting that, the use of accounting ratios can be effective if these
ratios are carefully used but the problem is lack of capacity to use them. This
has been confirmed by the accountant of the company of our case study.
For any business to prosper there is a need in decision
making. It is in this view, the accounting ratios can be considered as a
decision model, since they provide information from different aspects of the
business. The more the management use accounting ratios, the better the chance
it stands to guide dec ision making.
Finally, the findings enabled the researcher to test the
hypothesis. Basing on the findings the researcher confirms all hypotheses
stated.
5 2 Conclusion
Financial statement analysis involves analyzing the firm's
financial statements to extract information that can facilitate
decision-making. The use of accounting ratios as one of techniques used in
financial statements analysis can guide management in decision making by
playing a centre role in measuring the strength and weaknesses of the firm.
Ratio analysis for a business enterprise like AMAZI YA HUYE centres its efforts
to derive quantitative measures or guide concerning the expected capacity of
the firm to meet its future financial obligations or expectations.
Based on findings, AMAZI YA HUYE does not give much
significance in profitability ratios, the management staff of the company
believe that, net profit margin ratio, not only displays the profitability of
the company comparing to sales, but also the net profit ratio cans help in
expenses management. Thus, according to them there is no need of using any of
the profitability ratios.
right. It is observed that, others ratios like expenses
analysis ratio and gross margin ratio play a great role to determine the
profitability, as gross margin ratio decreases and the expenses analysis ratio
increases the net profit ratio decreases. There is a strong relationship of
these ratios to measure profitability of a company in order to control expenses
within the income earned to take measures for the future financial expenses and
revenues.
In addition to that, this study provides a method that can be
used to predict the financial failure as called Multiple Discriminant Analysis.
For our case study this model is not yet used but the researcher finds the
great role that can play this model to help all business entity to survive in
their economic environment.
Furthermore, it was found that, the accounting department has
a problem of using accounting ratio even the personnel of this department
accepts the effectiveness of using them, this is due to a lack of knowledge
required for the use of accounting ratio. Basing on the discussion with the
management staff, they accept the role that can play accounting ratios in
decision making but they present a problem of lack of capacity to use them.
From the researcher' s point of view, decision making in AMAZI
YA HUYE is effective, this is because of various reasons. First, the
use the accounting packages used by the company facilitates decision making,
whereby there is easy storage and access of data. Second, the use of
some of accounting ratios and other model like the flexible budget can provide
information from various aspects of business; all of these methods put the
management in a better position in decision making. Therefore the combination
of these qualities among others can ensure effective decision making.
However, the facts that AMAZI YA HUYE operates in the perfect
competition market, decision making of the company can have the more value to
survive in competitive market. In competitive market, for any firm to survive
the competition, there is a need of effective decision making to ensure the
efficiency. That is to say, the company should be vigilant on cost management
and profit maximisation.
Finally, the study objectives were attained and the questions to
be study were answered.
5 3 Recommendations
Based on the research findings, skills of the researcher and
other constraints accounted, we can finish this work by giving the following
recommendations that aimed at further improve dec ision making by the use of
accounting ratios for the great success of AMAZI YA HUYE:
1. Since the profit of AMAZI YA HUYE seems to be the same
based on the periods of this study, and this profit earned is obtained with
different sales turnover, for a better understanding of performance and
profitability in AMAZI YA HUYE, the company should calculate expenses analysis
ratio, gross margin ratio and net profit ratio for each period covered. It is
through this analysis that a company can be able to assess the expenses
incurred comparing to sales realized and gross margin obtained for a better
control of production cost and other expenses.
2. The company should improve its capacity to attract
potential investors by calculating its return to equity ratio and compare it to
the result of this ratio from the firms in same industry to test their ability
to increase the equity even from the external resources that the company can
benefit from potential investors.
3. The computation of multiple descriminat analysis should be
made at the end of each accounting period to assess the historical data in
order to predict the financial failure not for AMAZI YA HUYE as our case study,
but also for the other business entity to verify their going concern
situation.
4. The management of the company should look for the means of
disclosing company's financial statement to the professional accountants in
order to get advices and recommendations from these experts to get the fully
disclosed financial statement on which financial analysis could be conducted in
decision making
5. As in the country there is a lack of accounting
regulations, the ICPAR should prompt their settings and train the academician
accountants so that they can fill gaps of shortage of professional accountants
in Rwanda.
5 6 Area for further research
Research on the role of budgeting control in decision making
is encouraged because the budgeting control plays big role in quick decision
making. Further research should be conducted on the stakeholders' perspective
of accounting ratios.
Lastly, further research should also be done on the role of
qualified accountants in decision making and the firm's performance.
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