Personal Finance and Ratios: Reflective Essay on Wealth Management

This essay reflects on the benefits of financial ratio analysis in personal wealth management, drawing from a previous assessment and an article by Farrell (2006). It compares personal financial ratios, such as current ratio and debt-equity ratio, to those proposed in the article, considering the reasonableness of the proposed ratios. The analysis highlights the importance of factors like age and saving rate, which were initially overlooked. The essay concludes that while financial ratios are valuable tools, they have limitations related to inflation, projected income, and time period considerations. It suggests incorporating past performance and inflation factors for a more comprehensive financial assessment. Desklib offers similar solved assignments and resources for students.

Running head: REFLECTIVE PRACTICE FINANCIAL MANAGEMENT
Reflective practice financial management
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REFLECTIVE PRACTICE FINANCIAL MANAGEMENT
Table of Contents
Introduction................................................................................................................................2
Personal balance sheet and ratio analysis...................................................................................2
Difference in ratios.....................................................................................................................2
Analysis......................................................................................................................................3
Conclusion and actions..............................................................................................................3
Bibliography...............................................................................................................................4

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REFLECTIVE PRACTICE FINANCIAL MANAGEMENT
Introduction
Every investor is aware of fundamental and technical analysis’s importance for
evaluating the performance of the company. Financial ratios are the integral part for the
financial statement of the company and it assists in comparing the entities among different
accounting periods, among the industries and among the peers. In the same way, if any
person wants to analyse the position of personal finance on the basis of his financial
statement taking into consideration the net worth, cash flow and liquidity his financial
position can be measured based on the financial ratios.
Personal balance sheet and ratio analysis
Ratio Formula
Resul
t
Current ratio Current assets / Current liabilities 0.5
Debt equity ratio Total liabilities/Shareholder's equity 2
It can be identified from the above that the liquidity position of the person is not good
as the current assets of the person are half as compared to the current liabilities of the person.
Therefore, he is not in a position to cover up his short term obligations with the available
short term assets. On the other hand, debt equity ratio of 2 is indicating that the person is
highly leveraged as the liabilities are significantly higher as compared to the stakeholder’s
equity.
Difference in ratios
The ratios stated in the article are the savings to income ratio and debt to income ratio
whereas the ratios I have considered are the liquidity ratio and the debt to equity ratio. The
major differences among the ratios are that the ratios presented in the article have been
stressed on the income of the person and the ratios considered by me are stressed on the
liquidity position and leverage position of the person. Therefore, the major discrepancy is that
the article considered the household income and saving rate while I have considered the
business income and leverage position. Another discrepancy is that the article considered the
age of the person and his saving rate while I did not consider the age and saving rate and
analyzed the ratio at a point of time.

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REFLECTIVE PRACTICE FINANCIAL MANAGEMENT
Analysis
The benchmark ratios presented in the article took 2 important factors that is the age
of the people and their saving rate. However, I did not consider these facts and calculated the
ratios at a certain point if time and the period beyond that have not been considered. The
major factor that brought to my attention that I was not aware of that the age and saving rate
plays an important role in computing the personal financial status of the people. For instance,
if the person is in the age group of 45 to 50 and has not saved as per requirement, say only
3%, he must increase his income and saving rate significantly to get return in old age.
Further, if he made investment in such project that will provide return after long time period,
poor performance of the market can become the threat to his return.
Conclusion and actions
From the above discussion I conclude that personal financial ratios are important tool
to analyze the financial position of any person. However, it has some limitations that lead to
biasness and inappropriate analysis of the personal financial position of any person. The
limitations are as follows –
 Inflation – while computing the personal financial position the impact of inflation is
not taken into consideration. Assets recorded in the balance sheet that is recorded in
the historical value may not have the same value at present date owing to inflation.
 Projected income – the income and saving rate that is projected for the lifetime is
projected hypothetically. However, in reality the income and saving rate may not be
the same as projected.
 Time period – the ratios are calculated based on the data available at a certain point of
time and the data beyond that period or for previous period are not taken into
consideration generally. Therefore, computation of savings or retirement earning of
any person based on the data at a point of time will be misleading.
Therefore, I suggest that while computing the financial position of any person taking
into consideration various ratios, the past performance shall be taken into consideration.
Further, the inflation factor shall be taken into consideration while projecting the income and
rate of savings.

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REFLECTIVE PRACTICE FINANCIAL MANAGEMENT
Bibliography
Coloradolinux.com. (2018). [online] Available at: http://coloradolinux.com/~sjg/FPA-
Personal_Financial_Ratios.pdf [Accessed 7 Jun. 2018].
Doğan, M. (2013). Does firm size affect the firm profitability? Evidence from Turkey.
Research Journal of Finance and Accounting, 4(4), 53-59.
Faello, J. (2015). Understanding the limitations of financial ratios. Academy of Accounting
and Financial Studies Journal, 19(3), 75.
Gadoiu, M. (2014). Advantages and limitations of the financial ratios used in the financial
diagnosis of the enterprise. Scientific Bulletin-Economic Sciences, 13(2), 87-95.
Griffith.edu.au. (2018). [online] Available at:
https://www.griffith.edu.au/__data/assets/pdf_file/0028/205687/Financial-Planning-
Research-Journal-V1.pdf [Accessed 7 Jun. 2018].
Jarrow, R. (2013). A leverage ratio rule for capital adequacy. Journal of Banking & Finance,
37(3), 973-976.