1 Financial assessment techniques

The for-profit sector survives by generating profits. Profits fund the development of the next generation of goods and services that a firm supplies. The shareholders, who are the owners of the business also demand that a firm makes a profit. If a company is unable to return a share of its profits through dividend payments to its shareholders or ensure that the value of its shares continues to rise, shareholders will sell their shares and invest in some other venture. As well as ensuring that it doesn’t lose money, a firm has to make sure that owning shares is a better option for the shareholders than, say, investing their money in a bank or building society account.

The not-for-profit sector also needs to make its money work. Organisations in this sector may well not have shareholders who are seeking a return on their investment, but they still need to set the priorities for dealing with an almost unlimited demand on their budgets with limited resources to fund them. For example a UK local authority may have to decide whether it would be better value for its council tax and business rate payers to improve the insulation of its offices or to convert its vehicle fleet to run on liquefied petroleum gas (LPG), which is cheaper than petrol or diesel fuel.

Similarly a charity may need to decide whether it would be better to invest part of its capital reserves on the installation of photovoltaic panels on the roof of its premises and generate income from the sale of the power, or to invest the capital in a managed investment fund that will generate dividends to fund the charitable work.

This section looks at cash flow statements and then considers ways of assessing projects from the financial point of view.