Financial system and processes can be understood as set of procedures tracking financial activities of a company. It functions differently at global, regional and firm specific level. At the global level, it takes into account financial institutions, borrowers and lenders while at regional level financial system and processes is considered with exchange of funds between lenders and borrowers. It is worth mentioning that financial system is a wider term encompasses all aspects of finances like accounting measures, financial statements, cash flow management, ratios and management control, non- financial measures, credit policy and many more (Miles 2003).
Accounting measures keeps a check on the business activities-operating activities, investing activities and financing activities. The business firm performs wider range of activities and several groups of people are having interest in such activities. The performance of business activities require business firm to acquire assets and using assets for creating profits. In this regard, it is necessary to measure, monitor and control the performance of assets in terms of profit generation and cash flows. The costs created or caused by purchasing assets are measured against profit generated by it.
There has been significant change in the accounting measures in the past years and present time (Isard 2005). In the present years, the accounting measures are based on accrual system where transaction enters in the books at the time of occurrence rather than when actually payment is made or received. In the past time, events or transactions are entered only when the payment is received. The accrual accounting measures provide more accurate and clear picture of the company’s current condition through matching revenues with expenses (Dodaro 2009).
Financial statements present financial position of a business organisation at the end of specific period. There are two components of financial statements-statement of profit and loss and other comprehensive income. The performance of the company is provided through the financial statement enabling shareholders and investors to gain idea regarding profitability position of the company and base their investment decisions.
It has been analysed that current trend of financial statement is IFRS (international financial reporting standards) (Thakor 2006).It is introduced with the purpose of establishing uniformity in the financial statements prepared by regional, national and international level business firms. In detailed terms, it has been identified that there is significant difference between the financial statement prepared by regional and multinational corporations making difficult for investors and other stakeholders to analyse and arrive at decisions (Dodaro 2009).
In light of this, IFRS is introduced and all the business entities are asked to prepare financial statements in accordance with it. Under it, business firms are required to prepare and present the information in the comparative form, i.e., presenting information for the current and past period in comparative form (Allen 2001). The comparative presentation of information makes it easier to judge, evaluate and measure the financial performance. The items as income, expenses, revenue, depreciation, cost of sales, etc are entered in financial statements in accordance with IFRS. The format, layout and presentation of financial items are clearly specified by the IFRS and business entities of all sizes are under strict obligation to comply with it (Duffie 2013).
Third element of the financial system and process includes cash flow management emphasis on recording inflow and outflow of cash from business operations. The investing and financing decisions of a business firm is taken in light of cash flow statement. In simple terms, it can be understood in a manner that cash flow statement provides detailed assessment of where the money has come and gone during the accounting period (Allen 2001). There have been considerable shifts or change in the cash flow management. In the past years, cash flow statement provides general overview and description of the cash inflow and outflow.
In other words, there is summarised form and picture of cash inflow and outflow of business activities. However, with the increased significance of cash flow management in investing and financing decisions, cash flow statement is prepared in more bifurcated and detailed manner (Smith 2013). There is clear segregation of business activities in operating, investing, financing and other activities in order to comprehensively present and cover all the items. In all, cash flow management of present time provides detailed picture of inflow and outflow of cash from business operations and activities.
Moving further, ratios also form integral part of financial system and process concerned with inventory position and management, operating cycle, control systems and methods. It can also be defined that ratios act as performance measurer of business firms. The inventory, operating cycle, debtors and creditors positions, etc are regularly analysed in order to have an idea regarding capital structure, liquidity position, profitability margins, etc.
The ratios are also considered as internal tool of reducing waste and mismanagement (Buckley 2009). The purchase, sales, and stock are under strict check and control by the ratio. It has identified that different kinds of ratios are calculated for different purpose. The major ratios are profitability ratios, investment ratios, liquidity ratios, etc. The market analysts and investors gain understanding regarding company’s internal and external performance with the help of ratio analysis (Isard 2005).
Apart from above discussed financial measures, there are also non-financial measures of performance like market position, product leadership, product quality, production cycle, environmental responsibility, etc. All these aspects speak a lot regarding performance of a business entity thereby providing base for decision making. The investors and stakeholders do not measure and judge organisation’s performance only on the basis of financial measures. Rather, non-financial measures are also used for having comprehensive understanding of the performance of the business firm (Dodaro 2009).
It is also said that decision making process based only on financial measures do not provide accurate decisions. The aspects as market position, leadership status, technological advancements, product and service quality, wastage, production system, customer satisfaction index, delivery time, etc also assist in decision making process. The non-financial measures provide theoretical overview of the firm’s performance while financial measures provide practical insights. The perfect integration among financial and non-financial measures enables stakeholders to arrive at factual decisions (Miles 2003).
Allen, L. 2001. Global Financial System 1750-2000. Reaktion Books.
Buckley, R.P. 2009. International Financial System: Policy and Regulation. Kluwer Law International.
Dodaro, G.L. 2009. Core Financial System Checklist: Systems Reviewed Under the Federal Financial Management Improvement Act Of 1996. DIANE Publishing.
Duffie, D. 2013. Replumbing Our Financial System: Uneven Progress. International Journal of Central Banking, Vol. 9 No. S1.
Isard, P. 2005. Globalization and the International Financial System: What’s Wrong and What Can Be Done. Cambridge University Press.
Miles, B.L. 2003. The Canadian FINANCIAL System. Nova Publishers.
Smith, J. 2013. The Future of the Financial System: Or the End of the Alchemist Age. John Smith.
Thakor, A.V. 2006. The design of financial systems: An overview. Journal of Banking & finance 20, pp. 917-948.