Fundamentals of Financial Analysis

Questions: The purpose and objectives of financial analysis. The role of financial analysis in managerial decision-making. The relationship of financial and management analysis. Methods of financial analysis.


The purpose and objectives of the financial analysis


A key goal of the financial analysis - getting a certain number of basic parameters of the most representative, give an objective and reasonable characterization of the financial condition of the company. This applies primarily to changes in the structure of assets and liabilities, in settlements with debtors and creditors, in profit or loss.

Local objectives of financial analysis:

- Definition of the financial condition of the company;

- Identification of changes in the financial condition in the space-time section;

- The establishment of the main factors causing changes in the financial condition;

- Forecast of the main trends of financial condition.

Objectives of the study are obtained by solving a number of analytical tasks:

- A preliminary review of the financial statements;

- Characteristics of the property business: non-current and current assets;

- Assessment of financial stability;

-characteristic sources of funds;

- Analysis of profit and profitability;

- Development of measures to improve the financial and economic activity of the enterprise.


The role of financial analysis in managerial decision-making


Financial analysis is an important part of financial management. Financial management - the art of corporate financial management, that is, money relations, associated with the formation and use of their capital and income. This is manifested in the art of managing the development of sound financial strategies and tactics to help diagnosis of internal and external economic environment.

Diagnosis of internal environment includes the development of measures for the effective management of assets, equity and debt capital of the enterprise.

Analysis of the external environment is carried out according to the following parameters:

- The study of the dynamics of prices for goods and services;

- Tax rates and interest rates on bank loans and deposits, the rate of equity securities;

- Activities of competitors in the commodity and financial markets.

The analysis identified possible alternative solutions and their evaluation is carried out for implementation.

The reality of decisions depends on the quality of their analytical reasoning.

Financial analysis is the prerogative of the senior management of the enterprise, able to make decisions on the formation and use of capital and income, as well as affect the cash flows.

The effectiveness of local management decisions on the definition of the price of the finished product, the volume of purchases of material resources and the delivery of finished products, replacement of equipment and technologies evaluated in terms of the final financial result.

With the help of financial analysis decisions:

- Short-term financing of the company;

- Long-term financing;

- The payment of dividends to shareholders;

- Mobilization of reserves growth.


The relationship of financial and management analysis


Financial analysis - part of the overall economic analysis. It consists of closely interrelated areas: financial analysis and production management analysis. Classification analysis on financial and management due to the existing practice division accounting for financial and management accounting.

Financial analysis includes external financial analysis according to public financial reporting and internal financial analysis according to accounting and reporting.

Management analysis consists of an internal financial analysis according to the accounting and reporting, and analysis of farm production according to management accounting.

Financial analysis, which is based on data from public financial statements, taking on the traits of the external analysis as its study is carried out by a partner company, interested in his information. In reading public statements are a limited amount of information about the activities of a business entity that does not allow to reliably determine all aspects of its activities. Characteristic features of external financial analysis:

- The diversity of the subjects of analysis - users of information about the activities of the enterprise;

- Distinguish the goals and interests of the subjects of analysis;

- The use of standard techniques, accounting and reporting standards;

- Focus only on the analysis of public external reporting enterprise;

- Maximum openness of the analysis results to the user information on the work of the enterprise.

Partners enterprises carry out external financial analysis in the following areas:

- Analysis of financial stability, balance sheet liquidity and solvency;

- Analysis of the effectiveness of the use of assets, equity and debt;

- The study of absolute earnings;

- Analysis of the relative rates of return;

- An overall assessment of the financial condition of the company.

When conducting internal financial analysis as a source of information other than public financial statements are used synthetic accounting data (logs, orders, general ledger), normative and planned information, which is available at the facility. The main content of the analysis may be complemented by other aspects that are of fundamental importance for the company's management, such as the study of the status of stocks, the analysis of the dynamics of accounts receivable and payable, long-term and short-term investments.

Specific features of management analysis are:

- Focus the analysis on the interests of the company's management;

- The use of a maximum amount of information for analysis;

- The complexity of the analysis, that is, the study of all aspects of the enterprise;

- Interaction of planning, accounting and analysis for decision-making;

- Maximum closeness of the analysis to preserve trade secrets.

The main issue for the understanding of the content and effectiveness of the financial analysis is the concept of entrepreneurship as a system making use of resources for profit. Profit as a form of income of the enterprise acts as the final financial result of creating the necessary conditions for the preservation of its economic viability and further development. Regardless of the scope of the implementation of the business's ultimate goal remains unchanged. All variety of management decisions to achieve the key objectives of any business can be expressed in three aspects:

- Decisions on investment of capital;

- Activities carried out with the help of this capital;

- Assess the cost effectiveness of ongoing activities (financial transactions, investment projects).

Timely and qualitative study of financial and investment decisions characterizes the content of complex analysis in any area of business.


Methods of financial analysis


Practice developed the basic methods of financial analysis: horizontal analysis; vertical analysis; trend analysis; comparative (spatial) analysis; factor analysis; method of financial ratios.

The horizontal (time) analysis is to compare the financial statements with previous periods.

Vertical analysis is performed in order to determine the proportion of the individual items of the balance in the general outcome indicators and comparing the result with the data of the previous period.

Trend analysis is based on the calculation of the relative deviations of parameters for a number of reporting periods (quarters, years) on the level of the base period. With the trend formed the possible values of the indicators in the future that are performed predictive analysis.

Comparative (spatial) analysis based on the comparison of individual farm performance enterprise and inter-economic indicators similar to competing firms.

Factor analysis - the process of studying the influence of individual factors (causes) on a productive indicator using deterministic or stochastic methods of investigation.

Method of financial ratios - the ratios of the financial statements and identify the linkages indicators. In the analysis should take into account: the effectiveness of the applied methods of planning, the reliability of financial reporting, the use of different methods of accounting (accounting policy), the level of diversification of other companies, the static coefficient is applied.


  Questions for self-control

1. What is the main purpose of financial analysis.

2. What are the main objectives of financial analysis?

3. What role does the financial analysis in decision-making?

4. What is the relationship of financial and management analysis?

5. What are the main methods of financial analysis.

6. What is the essence of the horizontal analysis?

7. What is the vertical analysis?

8. What is the comparative analysis?

9. What is the essence of trend analysis?

10. What is the factor analysis?

11. What method is used financial ratios?