Financial analysis: What is it?
The financial analysis - this is the study of the main indicators of the financial condition and financial results of the organization’s activities with the aim of making management, investment and other decisions by interested parties. Financial analysis is part of broader terms: analysis of the financial and economic activities of an enterprise and economic analysis.
In practice, financial analysis is carried out using MS Excel tables or special programs. During the analysis of financial and economic activities, quantitative calculations are made various indicators, ratios, coefficients, as well as their qualitative assessment and description, comparison with similar indicators of other enterprises. Financial analysis includes analysis of the organization's assets and liabilities, its solvency, liquidity, financial results and financial stability, analysis of asset turnover (business activity). Financial analysis allows us to identify such important aspects as the possible probability of bankruptcy. Financial analysis is an integral part of the activities of such specialists as auditors and appraisers. Financial analysis is actively used by banks that decide whether to issue loans to organizations, accountants in the preparation of explanatory notes for annual reports, and other specialists.
Fundamentals of Financial Analysis
Financial analysis is based on the calculation of special indicators, often in the form of coefficients characterizing one or another aspect of the financial and economic activities of an organization. Among the most popular financial ratios are the following:
1) Autonomy coefficient (ratio of equity capital to total capital (assets) of the enterprise), financial dependence coefficient (ratio of liabilities to assets).
2) Current ratio (ratio current assets to short-term liabilities).
3) Quick liquidity ratio (the ratio of liquid assets, including cash, short-term financial investments, short-term receivables, to short-term liabilities).
4) Return on equity (the ratio of net profit to the enterprise’s equity)
5) Return on sales (the ratio of profit from sales (gross profit) to the company’s revenue), based on net profit (the ratio of net profit to revenue).
Financial analysis techniques
The following methods of financial analysis are usually used: vertical analysis (for example), horizontal analysis, predictive analysis based on trends, factor and other methods of analysis.
Among the legally (regulatory) approved approaches to financial analysis and methods, the following documents can be cited:
- Order of the Federal Administration for Insolvency (Bankruptcy) dated August 12, 1994 N 31-r
- Decree of the Government of the Russian Federation of June 25, 2003 N 367 “On approval of the Rules for conducting financial analysis by an arbitration manager”
- Regulations of the Central Bank of Russia dated June 19, 2009 N 337-P "On the procedure and criteria for assessing the financial position of legal entities - founders (participants) of a credit organization"
- Order of the FSFO of the Russian Federation dated January 23, 2001 N 16 “On approval of “Methodological guidelines for analyzing the financial condition of organizations”
- Order of the Ministry of Economy of the Russian Federation dated October 1, 1997 N 118 “On approval Methodological recommendations on the reform of enterprises (organizations)"
It is important to note that financial analysis is not just the calculation of various indicators and ratios, comparison of their values in statics and dynamics. The result qualitative analysis there should be a reasonable conclusion, supported by calculations, about the financial position of the organization, which will become the basis for decision-making by management, investors and other interested parties (see example). It is this principle that formed the basis for the development of the “Your Financial Analyst” program, which not only prepares a full report on the results of the analysis, but also does it without user participation, without requiring him to have knowledge of financial analysis - this greatly simplifies the life of accountants, auditors, and economists .
Sources of information for financial analysis
Very often, stakeholders do not have access to the organization’s internal data, so the organization’s public accounting reports serve as the main source of information for financial analysis. The main reporting forms - Balance Sheet and Profit and Loss Statement - make it possible to calculate all the main financial indicators and ratios. For a more in-depth analysis, you can use the organization’s cash flow and capital flow reports, which are compiled at the end of the financial year. An even more detailed analysis of individual aspects of the enterprise’s activities, for example, calculating the break-even point, requires initial data that lies outside the reporting framework (data from current accounting and production accounting).
For example, you can get a financial analysis based on your Balance Sheet and Profit and Loss Statement for free at online mode on our website (both for one period and for several quarters or years).
Altman Z-model (Altman Z-score)
Altman Z-model(Altman Z-score, Altman Z-Score) is a financial model (formula) developed by the American economist Edward Altman, designed to predict the probability of bankruptcy of an enterprise.
Enterprise Analysis
Under the expression " enterprise analysis" usually mean financial (financial-economic) analysis, or a broader concept, analysis of the economic activity of an enterprise (AHA). Financial analysis, analysis of economic activity refers to microeconomic analysis, i.e. analysis of enterprises as individual subjects of economic activity (as opposed to macroeconomic analysis, which involves the study of the economy as a whole).
Business Activity Analysis (ABA)
By using business activity analysis organization, the general trends in the development of the enterprise are studied, the reasons for changes in performance results are investigated, plans for the development of the enterprise are developed and approved and management decisions are made, the implementation of approved plans is monitored and decisions taken, reserves are identified in order to increase production efficiency, the results of the company’s activities are assessed, and an economic strategy for its development is developed.
Bankruptcy (Bankruptcy Analysis)
Bankruptcy, or insolvency- this is the inability of the debtor, recognized by the arbitration court, to fully satisfy the claims of creditors for monetary obligations and (or) to fulfill the obligation to make mandatory payments. The definition, basic concepts and procedures related to the bankruptcy of enterprises (legal entities) are contained in the Federal Law of October 26, 2002 N 127-FZ “On Insolvency (Bankruptcy)”.
Vertical reporting analysis
Vertical reporting analysis- technique of analysis of financial statements, in which the relationship of the selected indicator with other similar indicators within the same reporting period is studied.
Horizontal reporting analysis
Horizontal reporting analysis is a comparative analysis of financial data over a number of periods. This method is also known as trend analysis.
Background to financial analysis. The essence of financial analysis and its tasks. Classification of methods and techniques of analysis. Information basis of financial analysis. Types of financial analysis. The importance of financial analysis in modern conditions.
The financial analysis
The essay on business ethics was completed by a fourth year student gr. 7212 Kirsanov E.A.
Moscow State Industrial University
Faculty: Economics, management and information technology
Moscow, 2001
Introduction.
In the Russian Federation, the market economy and competition are gaining increasing strength as the main mechanism for regulating the economic process. The independence of enterprises and their economic and legal responsibility are increasing. The importance of financial stability of business entities is increasing sharply. All this significantly increases the role of analysis of their financial condition: the availability, placement and use of funds.
The results of such an analysis are needed primarily by owners, as well as creditors, investors, suppliers, managers and tax services, i.e. are the subject of attention of a wide range of market participants interested in the results of its functioning.
To ensure the survival of an enterprise in modern conditions, management personnel must, first of all, be able to realistically assess the financial condition of both their enterprise and existing potential competitors. Financial condition is the most important characteristic of the economic activity of an enterprise. It determines competitiveness, potential in business cooperation, assesses the extent to which the economic interests of the enterprise itself and its partners are guaranteed in financial and production terms. However, the ability to realistically assess the financial condition is not enough for the successful functioning of an enterprise and its achievement of its goal.
The competitiveness of an enterprise can only be ensured by proper management of the movement of financial resources and capital at its disposal.
In a market economy, an independent direction has long been formed that allows solving a number of assigned tasks, known as “Financial Management” or “Financial Management”.
In current conditions, a financial manager becomes one of the key figures in the enterprise. He is responsible for posing financial problems, analyzing the feasibility of using one or another method of solution adopted by the management of the enterprise, and proposing the most acceptable course of action.
The activities of a financial manager in general can be represented by the following areas: general financial analysis and planning; providing the enterprise with financial resources (management of sources of funds), distribution of financial resources (investment policy).
Successful financial management aims to:
– survival of the company in a competitive environment
– avoiding bankruptcy and major financial failures
– leadership in the fight against competitors
– acceptable growth rates of the company’s economic potential
– growth in production and sales volumes
– profit maximization
– cost minimization
– ensuring the profitable operation of the company
Background to financial analysis
Financial analysis in its modern form appeared relatively recently. Searching for the origins of the science of economic analysis is largely futile. Elements of the analytical function are inherent in any economic activity. In particular, analysis was an integral part of the system of manorial accounting and audit (a system of accounting and control on agricultural estates) in feudal Britain (12th century). It should be noted that, in contrast to the audit of the Greek and Roman periods, a feature of the British medieval audit was the auditor’s focus not only and not so much on inventorying property and controlling accounts, but primarily on calculating the results of a particular transaction. There were often cases when accounts were adjusted, and the amount for which the manager had to account to his master increased. There is an interrelation between accounting, control and analytical functions.
The founder of systematized economic analysis as an integral element of accounting, apparently, should be considered the Frenchman Jacques Savary (1622-1690), who introduced the concept of synthetic and analytical accounting (he is rightfully considered the forerunner of management accounting and the science of enterprise management). Of course, the formation and use of elements of economic analysis were observed at that time in other countries, in particular in Italy. Thus, A. Di Pietro promoted a methodology for comparing successive budget allocations with actual costs; B. Venturi built and analyzed time series of indicators of the enterprise’s economic activity for ten years.
Savary's ideas were deepened in the 19th century by the Italian accountant Giuseppe Cerboni (1827-1917), who created the doctrine of synthetic addition and analytical decomposition of accounting accounts. At the end of the nineteenth and beginning of the twentieth centuries. An original concept in accounting appeared - balance sheet science. It developed in three main directions: economic analysis of the balance sheet, legal analysis of the balance sheet, popularization of knowledge about the balance sheet among users.
The first direction was developed by I. Sher, P. Gerstner and F. Leitner. In particular, Gerstner introduced the concepts of analytical characteristics of the balance sheet: the ratio of short- and long-term liabilities, establishing an upper limit of borrowed funds in the amount of 50% of advanced capital, the relationship between financial condition and liquidity, etc. The main contribution to the development of the second direction was made by R. Beigel, E. Roemer, K. Porzig and other scientists. Within the framework of this direction, the theory and practice of accounting audit were later developed. The third direction was also developed mainly by German scientists: Brosius, Huber, Schönwandt and others.
In Russia, the science of balance analysis flourished in the first half of the twentieth century. A.K. Roshchakhovsky (1910) is rightfully considered the first Russian accountant to truly appreciate the role of economic analysis and its relationship with accounting. In the 20s, the theory of balance science, in particular the methodology for analyzing balance, was finally formulated in the works of A.P. Rudanovsky, N.A. Blatova, I.R. Nikolaeva and others. At the end of the 19th - beginning of the 20th centuries. The science of commercial computing is also actively developing. Balance sheet analysis and commercial calculations thus constituted the essence of financial analysis.
As the planned socialist economy was built in the Soviet Union, financial analysis was relatively quickly transformed into an analysis of economic activity. This happened through the natural (within the framework of a socialist economy) belittling the role of commercial calculations, strengthening the control function, dominating the analysis of deviations of actual values of indicators from planned ones, and reducing the importance of the balance sheet as a financial management tool. Analysis was increasingly separated from accounting, its financial nature was emasculated; in essence, it turned into a technical and economic analysis (analysis of production indicators, sales, labor and wages etc.), which was not really dealt with by anyone: neither accountants (since this is not within the scope of their activities, and is not of professional interest), nor managers. The essence of such analysis was the implementation of the “plan-fact” scheme, and the analysis itself was essentially replaced by control. This analysis was retrospective in nature and therefore of little use.
The transformation of accounting carried out as part of the restructuring of the economy on a market basis (early 90s) again brought back to life such an important element of analytical work as financial analysis. It is based on the analysis and management of the financial resources of a business entity as the main and priority type of resources. The main performers of this analysis were accountants and financial managers. It is important to note that the analysis of economic activity, understood as a technical and economic analysis, is not canceled - it simply becomes the prerogative of line managers.
The essence of financial analysis and its tasks.
The content and main goal of financial analysis is to assess the financial condition and identify the possibility of increasing the efficiency of the functioning of an economic entity with the help of rational financial policy. The financial condition of an economic entity is a characteristic of its financial competitiveness (i.e., solvency, creditworthiness), the use of financial resources and capital, and the fulfillment of obligations to the state and other economic entities.
In the traditional sense, financial analysis is a method of assessing and forecasting the financial condition of an enterprise based on its financial statements. It is customary to distinguish two types of financial analysis - internal and external. Internal analysis is carried out by enterprise employees (financial managers). External analysis is carried out by analysts who are outsiders to the enterprise (for example, auditors).
Analysis of the financial condition of an enterprise has several goals:
determination of financial position;
identifying changes in financial condition in space and time;
identification of the main factors causing changes in financial condition;
forecast of main trends in financial condition.
Achieving these goals is achieved through various methods and techniques.
3. Classification of methods and techniques of analysis.
The method of financial analysis is understood as a way of approaching the study of economic processes in their formation and development.
The characteristic features of the method include: the use of a system of indicators, identifying and changing the relationship between them.
In the process of financial analysis, a number of special methods and techniques are used.
Methods of applying financial analysis can be divided into two groups: traditional and mathematical.
The first group includes: the use of absolute, relative and average values; technique of comparison, summary and grouping, technique of chain substitutions.
The method of comparison is to compile financial indicators of the reporting period with their planned values and with the indicators of the previous period.
The method of summary and grouping is to combine information materials into analytical tables.
The method of chain substitutions is used to calculate the magnitude of the influence of factors in the overall complex of their impact on the level of the aggregate financial indicator. The essence of valuable substitution techniques is that by sequentially replacing each reporting indicator with a basic one, all other indicators are treated as unchanged. This replacement allows us to determine the degree of influence of each factor on the overall financial indicator.
The literature on financial analysis provides a variety of methods of financial analysis and their classification. They can be divided into three main groups:
1) Methods directly or indirectly borrowed from other sciences;
2) Models used in financial analysis;
3) Methods for reading financial statements.
There are various classifications of methods that can be applied in financial analysis. The first level of classification distinguishes between informal and formalized methods of analysis. The first are based on the description of analytical procedures at a logical level, rather than on strict analytical dependencies. These include methods: expert assessments, scenarios, psychological, morphological, comparisons, constructing systems of indicators, constructing systems of analytical tables, etc. The use of these methods is characterized by a certain subjectivity, since great importance have the intuition, experience and knowledge of an analyst.
The second group includes methods that are based on fairly strict formalized analytical dependencies. Dozens of these methods are known; they constitute the second level of classification. Let's list some of them.
Classical methods of analysis of economic activity and financial analysis: chain substitutions, arithmetic differences, balance sheet, isolating the isolated influence of factors, percentage numbers, differential, logarithmic, integral, simple and compound interest, discounting.
Traditional methods of economic statistics: average and relative values, groupings, graphical, index, elementary methods for processing dynamics series.
Mathematical and statistical methods for studying relationships: correlation analysis, regression analysis, variance analysis, factor analysis, principal component method, covariance analysis, object-period method, cluster analysis, etc.
Econometric methods: matrix methods, harmonic analysis, spectral analysis, theoretical methods production functions, methods of the theory of interindustry balance.
Methods of economic cybernetics and optimal programming: methods of system analysis, methods of machine simulation, linear programming, nonlinear programming, dynamic programming, convex programming, etc.
Operations research methods and decision theory: graph theory methods, tree method, Bayesian analysis methods, game theory, queuing theory, methods network planning and management.
Of course, not all of the listed methods can find direct application within the framework of financial analysis, since the main results of effective analysis and financial management are achieved with the help of special financial instruments, however, some of their elements are already in use. In particular, this applies to methods of discounting, machine simulation, correlation and regression analysis, factor analysis, processing time series, etc.
Financial analysis is carried out using various types of models that allow structuring and identifying the relationships between key indicators. Three main types of models can be distinguished: descriptive, predicative and normative.
Descriptive models, also known as descriptive models, are fundamental for assessing the financial condition of an enterprise. These include: construction of a system of reporting balance sheets, presentation of financial statements in various analytical sections, vertical and horizontal analysis of reporting, a system of analytical coefficients, analytical notes for reporting. All these models are based on the use of accounting information. The analysis carried out in the second section of this work will represent the construction of a descriptive model.
Predictive models are models of a predictive, predictive nature. They are used to forecast a company's income and its future financial condition. The most common of them are: calculating the point of critical sales volume, constructing predictive financial reports, dynamic analysis models (strictly determined factor models and regression models), situation analysis models.
Normative models. Models of this type allow you to compare the actual results of enterprises with the expected ones calculated according to the budget. These models are used primarily in internal financial analysis. Their essence comes down to establishing standards for each cost item for technological processes, types of products, responsibility centers, etc. and to the analysis of deviations of actual data from these standards. The analysis is largely based on the use of strictly deterministic factor models.
The basic principle of analytical reading of financial statements is a deductive method, that is, from the general to the specific, but it must be applied repeatedly. In the course of such an analysis, the historical and logical sequence of economic facts and events, the direction and strength of their influence on the results of activity are reproduced.
The practice of financial analysis has already developed the main types of analysis (methodology of analysis) of financial reports. Among them there are 6 main methods:
horizontal (time) analysis - comparison of each reporting item with the previous period;
vertical (structural) analysis - determining the structure of the final financial indicators, identifying the impact of each reporting item on the result as a whole;
trend analysis - comparison of each reporting item with a number of previous periods and determination of the trend, i.e. the main trend of the indicator dynamics, cleared of random influences and individual characteristics separate periods. With the help of a trend, possible values of indicators in the future are formed, and therefore, a promising forecast analysis is carried out;
analysis of relative indicators (coefficients) - calculation of relationships between individual report positions or positions of different reporting forms, determination of relationships between indicators;
comparative (spatial) analysis is both an intra-farm analysis of summary reporting indicators for individual indicators of an enterprise, branches, divisions, workshops, and an inter-farm analysis of the indicators of a given enterprise in comparison with the indicators of competitors, with industry average and average economic data;
factor analysis - analysis of the influence of individual factors (reasons) on a performance indicator using deterministic or stochastic research techniques. Moreover, factor analysis can be either direct (analysis itself), when the effective indicator is divided into its component parts, or reverse (synthesis), when its individual elements are combined into a common effective indicator.
In conclusion, it should be said that not all the methods and models outlined above will be used by me in this work during the analysis of the financial condition. This is due to the limited information available, as well as the fact that the analysis will be primarily external.
The analysis will use a descriptive model, i.e. a descriptive model within which the following methods and areas of analysis are applicable:
1) Vertical and horizontal analysis of reporting - the expression of this method will be the construction of a comparative analytical balance;
2) Construction of a system of analytical coefficients on the basis of which financial stability and liquidity will be considered;
3) Factor analysis - determining the degree of influence of individual components of an indicator on its value - will be carried out when considering the structure of assets and liabilities, sales revenue;
4) Profitability analysis - the indicators of this group will be used to assess the overall effectiveness of investing in a given enterprise.
Currently, it is almost impossible to isolate the techniques and methods of any science as inherent exclusively to it. Similarly, in financial analysis, various methods and techniques are used that have not previously been used in it.
4. Information basis of financial analysis.
The sources of information for financial analysis set the following tasks:
1). Determine which documents are the main sources for financial analysis;
2). Describe these documents, their advantages and disadvantages;
3). Determine the basic requirements for sources of financial analysis information.
The effectiveness of enterprise management is largely determined by the level of its organization and the quality of information support.
Accounting data is of particular importance as the information basis for financial analysis, and reporting becomes the main means of communication that provides a reliable representation of information about the financial condition of the enterprise. There are several reasons for this, the main one being a change in forms of ownership. This process, which is developing most dynamically in the sphere of circulation, quite naturally led to the destruction of many vertical connections and the subsequent information isolation of enterprises.
The main, most accessible and compact sources of information for analyzing the financial condition of an enterprise are financial reporting forms No. 1, 2, 3, and if the analysis is carried out by internal users, then also current accounting data.
The quarterly reporting includes: the balance sheet of the enterprise (Form No. 1) and a report on financial results and their use (Form No. 2). Annual financial statements include three standard forms: Form No. 1, Form No. 2, Form No. 3 - a report on the financial and property condition of the enterprise and an explanatory note. These forms are compiled by counting, grouping and specialized processing of current accounting data and are its final stage.
The main source of information for financial analysis is the enterprise’s balance sheet (Form No. 1 of annual and quarterly reporting), which provides a kind of “snapshot” of the financial condition at the beginning and end of the reporting period. Its importance in this regard is so great that financial analysis is often called balance sheet analysis. Although an in-depth analysis of financial condition has always involved the use of other forms of annual reports, as well as accounting data, the balance sheet plays a decisive role.
The logic and nature of the tasks of analyzing financial condition are closely interconnected with the form and structure of the balance sheet, the composition of sections and articles of its assets and liabilities. However, this does not mean, of course, that the form of the balance determines the logic and tasks of the analysis. The balance sheet generally reflects the economic assets of an enterprise in monetary value as of a certain date, grouped by their composition and sources of education. Therefore, the balance sheet, in essence, is a practically used system model that generally reflects the circulation of funds of an enterprise and the financial relations into which the enterprise enters during this circulation.
The source of data for the analysis of financial results is the report on financial results and their use (Form No. 2 of annual and quarterly reporting).
Why are such sources of information convenient for financial analysis?
First of all, by the fact that without preparing data for analysis based on the balance sheet of the enterprise (Form No. 1) and (Form No. 2), it is possible to make a comparative express analysis of the enterprise’s reporting indicators for previous periods.
Secondly: with the advent of special automated accounting programs for analyzing the financial condition of an enterprise, it is convenient, immediately after drawing up reporting forms, without leaving the program, to carry out a simple express analysis of the enterprise based on ready-made accounting reporting forms using the built-in financial analysis unit.
Financial analysis, based only on financial statements, takes on the character of external analysis, i.e. analysis carried out outside the enterprise by its interested counterparties, owners or government agencies. This analysis, based only on reporting data, which contains only a very limited part of information about the activities of the enterprise, does not allow revealing all the secrets of the success or failures of the company, however, it becomes possible for external users of the reporting to fairly objectively assess the financial condition of the enterprise, its business activity and profitability, without using information that is a trade secret.
There is a variety of economic information about the activities of enterprises and many ways to analyze these activities. Financial analysis based on financial statements is called the classical method of analysis. On-farm financial analysis uses data on technical preparation of production, regulatory and planning information and other system accounting data as a source of information.
Any enterprise, to one degree or another, constantly needs additional sources of financing. You can find them on the capital market, attracting potential investors and creditors by objectively informing them about your financial and economic activities, that is, mainly through financial reporting. How attractive the published financial results are, showing the current and future financial condition of the enterprise, is the likelihood of obtaining additional sources of financing.
The main requirement for the information presented in the reporting is that it be useful to users, i.e. so that this information can be used to make informed business decisions. To be useful, information must meet the following criteria:
1). Relevance means that the information is significant and influences the decision made by the user. Information is also considered relevant if it allows for prospective and retrospective analysis.
2). The reliability of information is determined by its veracity, the predominance of economic content over the legal form, the possibility of verification and documentary validity. Information is considered truthful if it does not contain errors and biased assessments, and also does not falsify economic events.
3). Neutrality - implies that financial reporting does not emphasize the interests of one group of users of general reporting to the detriment of another.
4). Understandability means that users can understand the content of the reporting without special professional training.
5). Comparability - requires that data about the activities of an enterprise are comparable with similar information about the activities of other firms.
During the preparation of reporting information, certain restrictions on the information included in the reporting must be observed:
1). The optimal balance of costs and benefits, which means that the costs of reporting should be reasonably related to the benefits that the enterprise derives from presenting this data to interested users.
2). The principle of prudence (conservatism) suggests that reporting documents should not allow an overestimation of assets and profits and an underestimation of liabilities.
3). Confidentiality requires that reporting information does not contain data that could harm the competitive position of the enterprise.
According to the scope of accessibility, information can be divided into open and closed (secret). The information contained in accounting and statistical reporting goes beyond the boundaries of the business entity and is open information. Each business entity develops its own targets, norms, standards, tariffs, limits, a system for their assessment and regulation of financial activities. This information constitutes his trade secret, and sometimes “know-how”.
In conclusion, based on the tasks set, the following conclusions can be drawn:
The main sources of information for financial analysis are: Form No. 1 and Form No. 2 of quarterly and annual reporting, Form No. 3 of annual reporting, internal accounting, planning and forecasting data;
Form No. 1 - “Balance Sheet of an Enterprise” - provides basic information for analyzing the financial condition at the beginning and end of the reporting period, as well as its dynamics for one or a number of reporting periods;
Form No. 2 - “Report on the financial results of the enterprise” provides information on the financial results of activities for the reporting period;
The main requirements for sources of information used in financial analysis are: relevance, reliability, neutrality, understandability, comparability;
According to the scope of availability, information is divided into open (financial reporting forms) and closed (internal accounting and planning information) or secret.
5. Types of financial analysis.
Current (retrospective) analysis is based on accounting and static reporting and allows you to evaluate the work of associations, enterprises and their divisions for the month, quarter and year on an accrual basis.
The main task of the current analysis is an objective assessment of the results of commercial activities, a comprehensive identification of existing reserves, their mobilization, achieving full compliance with material and moral incentives based on labor results and quality of work.
Current analysis is carried out during the summing up of economic activities, the results are used to solve management problems.
The peculiarity of the current analysis methodology is that actual performance results are assessed in comparison with the plan and data of the previous analytical period. This type of analysis has a significant drawback - the identified reserves are forever lost opportunities for increasing production efficiency, since they relate to the previous period.
Current analysis is the most full analysis financial activities, which absorbs the results of operational analysis and serves as the basis for long-term analysis.
Operational analysis is close in time to the moment of business transactions. It is based on primary (accounting and static) accounting data. Operational analysis is a system of daily study of the implementation of planned tasks in order to quickly intervene in the production process and ensure the efficiency of the enterprise.
Operational analysis is usually carried out according to the following groups of indicators: shipment and sales of products; use of labor, production equipment and material resources: cost; profit and profitability; solvency. During operational analysis, a study of natural indicators is carried out; relative inaccuracy is allowed in the calculations since there is no completed process.
Prospective analysis is the analysis of the results of economic activities in order to determine their possible values in future.
By revealing the picture of the future, long-term analysis provides the manager with solutions to strategic management problems.
In practical methods and research, the tasks of prospective analysis are specified by: objects of analysis; performance indicators; the best justification for long-term plans.
Prospective analysis as exploration of the future and the scientific and analytical basis of a long-term plan is closely related to forecasting, and such analysis is called predictive.
6. The importance of financial analysis in modern conditions
The modern financial system of the state consists of centralized and decentralized finance.
Finance is a set of economic monetary relations that arise in the process of production and sale of products, including the formation and use of cash income, ensuring the circulation of funds in the reproduction process, organizing relationships with other enterprises, the budget, banks, insurance organizations, etc.
Based on this, financial work at the enterprise is primarily aimed at creating financial resources for development, in order to ensure increased profitability, investment attractiveness, i.e. improving the financial condition of the enterprise.
Financial condition is a set of indicators that reflect the availability, placement and use of financial resources.
Since, the purpose of the analysis is not only and not so much to establish and evaluate the financial condition of the enterprise, but also to constantly carry out work aimed at improving it.
An analysis of the financial condition shows in which specific areas this work should be carried out and makes it possible to identify the most important aspects and weakest positions in the financial condition of the enterprise.
An assessment of the financial condition can be performed with varying degrees of detail depending on the purpose of the analysis, available information, software, technical and personnel support. The most appropriate is to separate the procedures for express analysis and in-depth analysis of financial condition.
Financial analysis makes it possible to evaluate:
Property status of the enterprise;
Degree of business risk;
Capital adequacy for current activities and long-term investments;
The need for additional sources of financing;
Ability to increase capital;
Rationality of borrowing funds;
The validity of the policy for the distribution and use of profits.
The basis of information support for the analysis of financial condition should be financial statements, which are uniform for the organization of all industries and forms of ownership.
It consists of the forms of financial statements approved by the Ministry of Finance of the Russian Federation, ordered dated March 27, 1996 No. 31 for financial statements in 1996, namely the balance sheet; report on financial results and their use - form No. 2; certificate to form No. 2 and appendices to the balance sheet, form No. 5, as well as statistical reporting on labor and cost Approved by the State Statistics Committee of the Russian Federation.
The results of financial analysis make it possible to identify vulnerabilities that require special attention and develop measures to eliminate them.
It is no secret that the process of making management decisions is more an art than a science. The result of the formalized analytical procedures performed is not, or at least should not be, the only criterion for making a particular management decision. The results of the analysis are the “material basis” of management decisions, the adoption of which is also based on the intelligence, logic, experience, personal likes and dislikes of the person making these decisions.
All this once again indicates that financial analysis in modern conditions is becoming an element of management, a tool for assessing the reliability of a potential partner.
The need to combine formalized and informal procedures in the process of making management decisions leaves its mark both on the procedure for preparing documents and on the sequence of procedures for analyzing financial condition. It is this understanding of the logic of financial analysis that is most consistent with the logic of the functioning of an enterprise in a market economy.
Financial analysis is part of a general, complete analysis of economic activity; if it is based on data only from financial statements - external analysis; On-farm analysis can be supplemented with other aspects: analysis of the efficiency of capital advances, analysis of the relationship between costs, turnover and profit, etc.
Financial analysis of the enterprise’s activities includes:
Analysis of financial condition;
Financial stability analysis;
Analysis of financial ratios:
Analysis of balance sheet liquidity;
Analysis of financial results, profitability ratios and business activity.
7. A system of indicators characterizing the financial condition of the enterprise.
Financial activity is the working language of business, and it is almost impossible to analyze the operations or results of an enterprise other than through financial indicators.
In an effort to solve specific issues and obtain a qualified assessment of the financial situation, business managers are increasingly beginning to resort to financial analysis; the value of abstract data from the balance sheet or income statement is very small if they are considered in isolation from each other. Therefore, to objectively assess the financial situation, it is necessary to move on to certain value relationships of the main factors - financial indicators or ratios.
Financial ratios characterize the proportions between various reporting items. The advantages of financial ratios are the simplicity of calculations and elimination of the influence of inflation.
It is believed that if the level of actual financial ratios is worse than the comparison base, then this indicates the most painful places in the activities of enterprises that require additional analysis. Is it true, additional analysis may not confirm a negative assessment due to the specificity of specific conditions and features of the enterprise’s business policy. Financial ratios do not capture differences in accounting methods and do not reflect the quality of the constituent components. Finally, they are static in nature. It is necessary to understand the limitations of their use and treat them as an analysis tool.
For a financial manager, financial ratios are of particular importance because they are the basis for assessing his activities by external users of financial statements, shareholders and creditors. The targets of the financial analysis carried out depend on who conducts it: managers, tax authorities, owners (shareholders) of the enterprise or its creditors.
The tax authority is interested in the answer to the question of whether the enterprise is capable of paying taxes. Therefore, from the point of view of the tax authorities, the financial situation is characterized by the following indicators:
– balance sheet profit;
– return on assets = book profit as a percentage of asset value
– profitability of sales = balance sheet profit as a percentage of sales revenue;
– balance sheet profit per 1 ruble means to pay for labor.
Based on these indicators, tax authorities can determine the receipt of payments to the budget for the future.
Banks must receive an answer to the question of the solvency of the enterprise, that is, its readiness to repay borrowed funds and liquidate its assets.
Enterprise managers are primarily concerned with resource efficiency and enterprise profitability.
8. Assessment of financial stability.
One of the most important characteristics of the financial condition of an enterprise is the stability of its activities in the light of a long-term perspective.
“Equity concentration coefficient” - characterizes the share of the owners of the enterprise in the total amount of funds advanced for its activities. The higher the value of this coefficient, the more financially stable the enterprise.
“Financial dependence ratio” is the inverse of the equity capital concentration ratio. The growth of this indicator in dynamics means borrowed funds.
“Equity capital flexibility coefficient” - shows what part of equity capital is used to finance current activities, i.e. invested in working capital.
“Long-term investment structure coefficient” - the coefficient shows what part of fixed assets and other non-current assets is financed by external investors.
“Long-term borrowing ratio” – characterizes the capital structure. The higher the indicator in dynamics, the more dependent the enterprise is on external investors.
“Ratio of own and borrowed funds” - it gives a general assessment of the financial stability of the enterprise. The growth of the indicator indicates increasing dependence on external investors. (Calculation of coefficients is given in Appendix 2).
It must be said that there are no uniform normative criteria for the considered indicators. They depend on many factors: industry, lending principles, the existing structure of sources of funds, etc.
Therefore, it is better to determine the acceptability of the values of these indicators by groups of related enterprises. The only rule that “works”: the owners of the enterprise (investors and other persons who have made contributions to authorized capital) prefer reasonable growth in the dynamics of borrowed funds, and lenders give preference to enterprises with a high share of equity capital and greater financial autonomy.
Conclusion.
The main goal of a manufacturing enterprise in modern conditions is to obtain maximum profit, which is impossible without effective management capital. The search for reserves to increase the profitability of the enterprise is the main task of the manager.
It is obvious that the performance of the enterprise as a whole depends entirely on the efficiency of management of financial resources and the enterprise. If things at the enterprise go by themselves, and the management style does not change in new market conditions, then the struggle for survival becomes continuous.
For the financial stability of the company (enterprise), it is recommended to carry out the following activities:
First of all, it is necessary to change the attitude towards production management,
Learn new management methods and techniques,
Improve the management structure,
Self-improvement and training of staff,
Improve personnel policy,
Think over and carefully plan your pricing policy,
Find reserves to reduce production costs,
Actively engage in planning and forecasting of enterprise financial management.
Enterprises are the main links in economic management and form the basis of the economic potential of the state.
The more profitable the company, the more stable its income, the greater its contribution to the social sphere of the state, to its economic potential, and finally, the better the lives of the people working at such an enterprise.
So, the goal of my essay was achieved; it discussed the main, in my opinion, issues related to financial analysis.
Bibliography
Kovalev V.V. “Financial analysis: Capital management. Choice of investments. Analysis of reporting." - M.: Finance and Statistics, 1996. - 432s.
"Financial management: theory and practice" / Ed. Stoyanova E.S. - M.: Perspective, 1996.
Reference legal system "Garant", spring 2001.
"Big Encyclopedia of Cyril and Methodius", 2001.
Financial activity of the enterprise
Before moving directly to the topic of the article, you should understand the essence of the concept of financial activity of an enterprise.
Financial activities at the enterprise– financial planning and budgeting, financial analysis, management of financial relations and funds, determination and implementation of investment policy, organization of relations with budgets, banks, etc.
Financial activities solve such problems as:
- providing the enterprise with the necessary financial resources for financing its production and sales activities, as well as for the implementation of investment policy;
- taking advantage of promotion opportunities efficiency activities of the enterprise;
- ensuring timely repayment current and long-term liabilities;
- determination of optimal credit conditions to expand sales volume (deferment, installment plan, etc.), as well as collection of generated accounts receivable;
- traffic control and redistribution financial resources within the boundaries of the enterprise.
Feature of the analysis
Financial indicators allow you to measure the effectiveness of work in the above areas. For example, liquidity indicators allow us to determine the ability to timely repay short-term obligations, while financial stability ratios, which are the ratio of equity and debt capital, allow us to understand the ability to meet obligations in the long term. The financial stability ratios of another group, which show the adequacy of working capital, make it possible to understand the availability of financial resources to finance activities.
Indicators of profitability and business activity (turnover) show how much the company uses the available opportunities to improve operational efficiency. Analysis of receivables and payables allows us to understand credit policy. Considering that profit is formed under the influence of all factors, it can be argued that analysis of financial results and profitability analysis allows us to obtain a comprehensive assessment of the quality of the financial activity of the enterprise.
The effectiveness of financial activities can be judged from two aspects:
- Results financial activities;
- Financial condition enterprises.
The first is expressed by how effectively the company can use its existing assets, and most importantly, whether it can generate profit and to what extent. The higher the financial result for each ruble of invested resources, the better the result of financial activities. However, profitability and turnover are not the only indicators of a company's financial performance. The opposite and related category is the level of financial risk.
The current financial condition of the enterprise just means how sustainable is an economic system. If a company is able to meet its obligations in the short and long term, ensure uninterrupted production and sales processes, and also reproduce expended resources, then we can assume that while maintaining current market conditions the enterprise will continue to operate. In this case, the financial condition can be considered acceptable.
If a company is able to generate high profits in the short and long term, then we can talk about efficient financial activities.
In the process of analyzing the financial activities of an enterprise, both when analyzing financial results and in the process of assessing its condition, the following methods should be used:
- horizontal analysis - analysis speakers financial results, as well as assets and sources of their financing, will allow us to determine the general trends in the development of the enterprise. As a result, one can understand the medium and long term prospects of his work;
- vertical analysis – assessment of the formed structures assets, liabilities and financial results will help identify imbalances or ensure the stability of the company’s current performance;
- comparison method – comparison data with competitors and industry averages will allow you to determine the efficiency of the company’s financial activities. If the enterprise demonstrates higher profitability, then we can talk about high-quality work in this direction;
- coefficient method - in the case of studying the financial activities of an enterprise, this method is important, since its use will allow obtaining a total indicators, which characterize both the ability to demonstrate high results and the ability to maintain sustainability.
- factor analysis - allows you to determine the main factors that influenced the current financial position and financial performance of the company.
Analysis of the financial results of the enterprise
Investors are interested in profitability, as it allows them to evaluate the effectiveness of management and the use of capital that was provided by the latter for the purpose of making a profit. Other participants financial relations For example, creditors, employees, suppliers and customers are also interested in understanding the profitability of a company's activities, as this allows them to estimate how smoothly the company will operate in the market.
Therefore, profitability analysis allows us to understand how effectively management implements the company’s strategy to generate financial results. Considering a large number of tools that are in the hands of the analyst when assessing profitability, it is important to use a combination of different methods and approaches in the process.
Although firms report net profits, more important indicator The aggregate financial result is considered as an indicator that better shows the profitability of the company's shares. There are two main alternative approaches to assessing profitability.
First approach involves consideration of various transformations of the financial result. Second approach– indicators of profitability and profitability. In the case of applying the first approach, such indicators as the return on shares of the enterprise, horizontal and vertical analysis, assessment of the growth of indicators, consideration of various financial results (gross profit, profit before tax, and others) are used. In the case of applying the second approach, the indicators of return on assets and return on equity are used, which provide for obtaining information from the balance sheet and income statement.
These two metrics can be broken down into profit margin, leverage and turnover, which provides a better understanding of how a company generates wealth for its shareholders. In addition, margins, turnover and leverage can be analyzed in more detail and broken down into different line items from the financial statements.
Analysis of financial performance indicators of the enterprise
It is worth noting that the most important method is the method of indicators, also known as the method of relative indicators. Table 1 presents groups of financial ratios that are best suited for analyzing performance.
Table 1 – Main groups of indicators that are used in the process of assessing the company’s financial results
It is worth considering each of the groups in more detail.
Turnover indicators (indicators of business activity)
Table 2 presents the most commonly used business ratios. It shows the numerator and denominator of each coefficient.
Table 2 - Turnover indicators
|
Business activity indicator (turnover) |
Numerator |
Denominator |
|
Cost price |
Average inventory value |
|
|
Number of days in period (for example, 365 days if yearly data is used) |
Inventory turnover |
|
|
Average value of accounts receivable |
||
|
Number of days in the period |
Accounts receivable turnover |
|
|
Cost price |
Average value of accounts payable |
|
|
Number of days in the period |
Accounts payable turnover |
|
|
Working capital turnover |
Average cost of working capital |
|
|
Average cost of fixed assets |
||
|
Average asset value |
Interpretation of turnover indicators
Inventory turnover and period of one inventory turnover . Inventory turnover is the basis of operations for many organizations. The indicator indicates resources (money) that are in the form of inventories. Therefore, such a ratio can be used to indicate the effectiveness of inventory management. The higher the inventory turnover ratio, the shorter the period the inventory is in the warehouse and in production. In general, inventory turnover and period of one inventory turnover should be estimated according to industry norms.
High An inventory turnover ratio compared to industry norms may indicate high efficiency in inventory management. However, it is also possible that this turnover ratio (and a low one-period turnover rate) could indicate that the company is not building adequate inventory, which could cause a shortage to hurt revenue.
To evaluate which explanation is more likely, an analyst can compare a company's earnings growth to industry growth. Slower growth coupled with higher inventory turnover may indicate insufficient inventory levels. Revenue growth at or above industry growth supports the interpretation that high turnover reflects greater inventory management efficiency.
Short The inventory turnover ratio (and correspondingly high turnover period) relative to the industry as a whole may be an indicator of the slow movement of inventory in the operational process, perhaps due to technological obsolescence or changes in fashion. Again, comparing a company's sales growth to the industry can provide insight into current trends.
Receivables turnover and period of one receivables turnover . The accounts receivable turnover period represents the time that elapses between sale and collection, which reflects how quickly a company collects cash from customers to whom it offers credit.
Although it is more correct to use credit sales in the numerator, information on credit sales is not always available to analysts. Therefore, revenue reported on the income statement is generally used as the numerator.
A relatively high accounts receivable turnover ratio may indicate high efficiency in lending to and collecting money from customers. On the other hand, a high accounts receivable turnover ratio may indicate that lending or debt collection terms are too strict, indicating a possible loss of sales to competitors who offer more lenient terms.
Relatively low Accounts receivable turnover typically raises questions about the effectiveness of credit and collection procedures. As with inventory management, comparing a company's sales growth to its industry can help the analyst evaluate whether sales are being lost due to strict credit policies.
In addition, by comparing uncollectible accounts receivable and actual loan losses with past experience and with similar companies, it is possible to assess whether low turnover reflects problems in managing commercial lending to customers. Companies sometimes provide information about accounts receivable stitching. This data can be used in conjunction with turnover rates to draw more accurate conclusions.
Accounts payable turnover and accounts payable turnover period . The accounts payable turnover period reflects the average number of days a company takes to pay its suppliers. The accounts payable turnover ratio indicates how many times a year the company covers its debts to its creditors.
For the purposes of calculating these figures, it is assumed that the company makes all of its purchases using trade credit. If the volume of goods purchased is not available to the analyst, then the cost of goods sold indicator can be used in the calculation process.
High accounts payable turnover ratio (low period of one turnover) in relation to the industry may indicate that the company is not in to the fullest uses available credit funds. On the other hand, this may mean that the company uses a system of discounts for earlier payments.
Excessively low the turnover ratio may indicate problems with timely payment of debts to suppliers or the active use of soft supplier credit conditions. This is another example of when you should look at other indicators to form informed conclusions.
If liquidity ratios indicate that the company has sufficient cash and other short-term assets to pay obligations, and yet the payables turnover period is high, then this will indicate lenient credit terms of the supplier.
Working capital turnover . Working capital is defined as current assets minus current liabilities. Working capital turnover indicates how efficiently a company generates income from its working capital. For example, a working capital ratio of 4 indicates that the company generates 4 rubles of income for every 1 ruble of working capital.
A high value of the indicator indicates greater efficiency (i.e., the company generates a high level of income relative to a smaller amount of attracted working capital). For some companies, the amount of working capital may be close to zero or negative, making this indicator difficult to interpret. The following two ratios will be useful in these circumstances.
Fixed asset turnover (capital productivity) . This metric measures how efficiently a company generates returns from its capital investments. As a rule, more high the fixed asset turnover ratio shows a more efficient use of fixed assets in generating income.
Low the value may indicate that the business is inefficient, capital-intensive, or that the business is not operating at full capacity. In addition, fixed asset turnover may be influenced by other factors not related to business performance.
The capital productivity ratio will be lower for companies whose assets are newer (and therefore less worn out, reflected in the financial statements by a higher book value) compared to companies with older assets (which are more worn out and thus recorded at a lower value). book value).
The capital productivity indicator may be unstable, since income may have a steady growth rate, and the increase in fixed assets occurs in spurts; therefore, each annual change in the indicator does not necessarily indicate important changes in the company's efficiency.
Asset turnover . Total asset turnover ratio measures general ability companies generate income with a given level of assets. A ratio of 1.20 would mean that the company generates 1.2 rubles of income for every 1 ruble of assets. A higher ratio indicates greater efficiency of the company.
Since this ratio includes both fixed and working capital, poor working capital management can skew the overall interpretation. Therefore, it is useful to analyze working capital and capital productivity ratios separately.
Short The asset turnover ratio may indicate poor performance or a relatively high level of capital intensity of the business. The metric also reflects strategic management decisions: for example, the decision to take a more labor-intensive (and less capital-intensive) approach to one's business (and vice versa).
Second important group indicators are profitability and profitability ratios. These include the following coefficients:
Table 3 – Profitability and Profitability Indicators
|
Profitability and profitability indicator |
Numerator |
Denominator |
|
Net profit |
Average asset value |
|
|
Net profit |
||
|
Gross Margin |
Gross profit |
|
|
Revenue from sales |
||
|
Net profit |
||
|
Average asset value |
Net profit |
|
|
Average cost of equity |
Net profit |
Profitability indicator assets shows how much profit or loss the company receives for each ruble of invested assets. A high value of the indicator indicates the effective financial performance of the enterprise.
Return on equity is a more important indicator for the owners of the enterprise, since this coefficient is used when assessing investment alternatives. If the value of the indicator is higher than in alternative investment instruments, then we can talk about the high-quality financial activity of the enterprise.
Margin indicators provide insight into sales performance. Gross Margin shows how many resources remain in the company for management and sales expenses, interest costs, etc. Operating margin demonstrates the effectiveness of the organization's operational process. This indicator allows you to understand how much operating profit will increase if sales increase by one ruble. Net Margin takes into account the influence of all factors.
Return on assets and equity allows you to determine how much time the company needs for the funds raised to pay off.
Analysis of the financial condition of the enterprise
Financial condition, as stated above, means the stability of the current financial and economic system of the enterprise. To study this aspect, you can use the following groups of indicators.
Table 4 – Groups of indicators that are used in the state assessment process
Liquidity ratios (liquidity ratios)
Liquidity analysis, which focuses on cash flow, measures a company's ability to meet its short-term obligations. The fundamentals of this group are a measure of how quickly assets are converted into cash. During daily operations, liquidity management is usually achieved through the efficient use of assets.
The level of liquidity must be considered depending on the industry in which the enterprise operates. A particular company's liquidity position may also vary depending on its anticipated need for funds at any given time.
Assessing the adequacy of liquidity requires an analysis of a company's historical funding needs, current liquidity position, expected future funding needs, and options for reducing funding requirements or raising additional funds (including actual and potential sources of such funding).
Large companies tend to have better control over the level and composition of their liabilities compared to smaller companies. Thus, they may have more potential sources of financing, including owner's capital and credit market funds. Access to capital markets also reduces the required liquidity buffer compared to companies without such access.
Contingent obligations such as letters of credit or financial guarantees may also be relevant in assessing liquidity. The importance of contingent liabilities varies between the non-banking and banking sectors. In the non-banking sector, contingent liabilities (usually disclosed in a company's financial statements) represent a potential cash outflow and must be included in the assessment of a company's liquidity.
Calculation of liquidity ratios
Key liquidity ratios are presented in Table 5. These liquidity ratios reflect the position of a company at a particular point in time and therefore use data at the end of the balance sheet date rather than average balance sheet values. Indicators of current, quick and absolute liquidity reflect the company's ability to pay current obligations. Each uses a progressively stricter definition of liquid assets.
Measures how long a company can pay its daily cash expenses using only existing liquid assets, without additional cash flows. The numerator of this ratio includes the same liquid assets used in quick liquidity, and the denominator is an estimate of daily cash expenses.
To obtain daily cash expenses, the total amount of cash expenses for the period is divided by the number of days in the period. Therefore, to obtain cash expenses for a period, it is necessary to summarize all expenses in the income statement, including such as: cost; sales and administrative expenses; other expenses. However, the amount of expenses should not include non-cash expenses, for example, the amount of depreciation.
Table 5 – Liquidity indicators
|
Liquidity indicators |
Numerator |
Denominator |
|
Current assets |
Current responsibility |
|
|
Current assets - inventories |
Current responsibility |
|
|
Short-term investments and cash and cash equivalents |
Current responsibility |
|
|
Guard interval indicator |
Current assets - inventories |
Daily expenses |
|
Inventory turnover period + accounts receivable turnover period – accounts payable turnover period |
The financial cycle is a metric that is not calculated in ratio form. It measures the length of time it takes for a business to go from putting in cash (invested in an activity) to receiving cash (as a result of the activity). During this period of time, the company must finance its investment activities from other sources (i.e., debt or equity).
Interpretation of liquidity ratios
Current liquidity . This indicator reflects current assets (assets that are expected to be consumed or converted into cash within one year) per ruble of current liabilities (liabilities maturing within one year).
More high the ratio indicates a higher level of liquidity (i.e. greater ability to meet short-term obligations). A current ratio of 1.0 would mean that the book value of current assets is exactly equal to the book value of all current liabilities.
More low the value of the indicator indicates less liquidity, which implies greater dependence on operating cash flow and external financing to meet short-term obligations. Liquidity affects a company's ability to borrow money. The underlying assumption of the current ratio is that inventory and receivables are liquid (if inventory and receivables turnover ratios are low, this is not the case).
Quick ratio . The quick ratio is more conservative than the current ratio because it includes only the most liquid current assets (sometimes called "quick assets"). Like the current ratio, a higher quick ratio indicates the ability to meet debt obligations.
This indicator also reflects the fact that inventories cannot be easily and quickly converted into cash, and, in addition, the company will not be able to sell its entire inventory of raw materials, supplies, goods, etc. for an amount equal to its book value, especially if the inventory needs to be sold quickly. In situations where inventory is illiquid (for example, in the case of a low inventory turnover ratio), quick liquidity can be best indicator liquidity than the current ratio.
Absolute liquidity . The ratio of cash to current liabilities usually provides a reliable measure of the liquidity of an individual business in a crisis situation. Only highly liquid short-term investments and cash are included in this indicator. However, it is worth considering that in a crisis, the fair value of liquid assets valuable papers may decline significantly as a result of market factors, in which case it is advisable to use only cash and cash equivalents in the absolute liquidity calculation process.
Guard interval indicator . This ratio measures how long a company can continue to pay its expenses with its existing liquid assets without receiving any additional cash inflow.
A guard interval ratio of 50 would mean that the company can continue to pay its operating expenses for 50 days from fast assets without any additional cash inflows.
The higher the protective interval indicator, the higher the liquidity. If a company's safety margin is very low relative to its peers or relative to the company's own history, the analyst needs to determine whether there is sufficient cash flow to enable the company to meet its obligations.
Financial cycle . This indicator indicates the amount of time that passes from the moment an enterprise invests money in other forms of assets until the moment it collects funds from clients. A typical operating process involves receiving inventory on a deferred basis, which creates accounts payable. The company then also sells this inventory on credit, resulting in an increase in accounts receivable. After this, the company pays its invoices for the goods and services supplied, and also receives payment from customers.
The time between spending cash and collecting cash is called the financial cycle. More short cycle indicates greater liquidity. It means that a company must finance its inventory and accounts receivable only for a short period of time.
More long cycle indicates lower liquidity; this means that the company must finance its inventory and receivables over a longer period of time, which may result in the need to raise additional funds for working capital.
Indicators of financial stability and solvency
Solvency ratios are mainly of two types. Debt ratios (type one) focus on the balance sheet and measure the amount of debt capital relative to a company's equity or total funding sources.
Coverage ratios (the second type of ratio) focus on the income statement and measure a company's ability to cover its debt payments. All of these indicators can be used in assessing the creditworthiness of a company and, therefore, in assessing the quality of the company's bonds and other debt obligations.
Table 6 – Financial stability indicators
|
Indicators |
Numerator |
Denominator |
|
Total liabilities (long-term + short-term liabilities) |
Total liabilities |
|
|
Equity |
Total liabilities |
|
|
Debt to equity |
Total liabilities |
Equity |
|
Financial leverage |
Equity |
|
|
Interest coverage ratio |
Earnings before taxes and interest |
Percentage to be paid |
|
Fixed charge coverage ratio |
Profit before tax and interest + lease payments + rent |
Interest payable + lease payments + rent |
In general, these indicators are most often calculated in the manner shown in Table 6.
Interpretation of solvency ratios
Financial dependence indicator . This ratio measures the percentage of total assets financed by debt. For example, a debt-to-asset ratio of 0.40 or 40 percent indicates that 40 percent of a company's assets are financed by debt. Generally, a higher debt ratio means higher financial risk and thus weaker solvency.
Financial autonomy indicator . The indicator measures the percentage of a company's capital (debt and equity) represented by equity. Unlike the previous ratio, a higher value usually means lower financial risk and thus indicates strong solvency.
Debt to Equity Ratio . The debt-to-equity ratio measures the amount of debt capital relative to equity capital. The interpretation is similar to the first indicator (i.e., a higher ratio indicates weaker solvency). A ratio of 1.0 would indicate equal amounts of debt and equity, equivalent to a debt-to-liability ratio of 50 percent. Alternative definitions of this ratio use the market value of shareholders' equity rather than its book value.
Financial leverage . This ratio (often simply called the leverage ratio) measures the amount of total assets supported by each monetary unit of equity. For example, a value of 3 for this indicator means that every 1 ruble of capital supports 3 rubles of total assets.
The higher the leverage ratio, the more leverage a company has to use debt and other liabilities to finance assets. This ratio is often defined in terms of average total assets and average total equity and plays an important role in the DuPont return on equity decomposition.
Interest coverage ratio . This ratio measures how many times a company can cover its interest payments through earnings before interest and taxes. A higher interest coverage ratio indicates stronger solvency and solvency, providing creditors with high confidence that the company can service its debt (i.e., banking sector debt, bonds, bills, debt of other enterprises) through operating profits.
Fixed charge coverage ratio . This metric takes into account fixed expenses or liabilities that result in a company's steady cash outflow. It measures the number of times a company's earnings (before interest, taxes, rent, and leasing) can cover its interest and lease payments.
Similar to the interest coverage ratio, a higher fixed charge ratio implies strong solvency, meaning that a business can service its debt through its core business. The indicator is sometimes used to determine the quality and likelihood of receiving dividends on preferred shares. If the indicator value is higher, this indicates a high probability of receiving dividends.
Analysis of the financial activities of an enterprise using the example of PJSC Aeroflot
The process of analyzing financial activities can be demonstrated using the example of the well-known company PJSC Aeroflot.
Table 6 - Dynamics of assets of PJSC Aeroflot in 2013-2015, million rubles.
|
Indicators |
Absolute deviation, +,- |
Relative deviation, % |
||||||
|
Intangible assets |
||||||||
|
Research and development results |
||||||||
|
Fixed assets |
||||||||
|
Long-term financial investments |
||||||||
|
Deferred tax assets |
||||||||
|
Other noncurrent assets |
||||||||
|
NON-CURRENT ASSETS TOTAL |
||||||||
|
Value added tax on purchased assets |
||||||||
|
Accounts receivable |
||||||||
|
Short-term financial investments |
||||||||
|
Cash and cash equivalents |
||||||||
|
Other current assets |
||||||||
|
CURRENT ASSETS TOTAL |
||||||||
As can be judged from the data in Table 6, during 2013-2015 there is an increase in the value of assets - by 69.19% due to the growth of current and non-current assets (Table 6). In general, the company is able to effectively manage working resources, because in conditions of sales growth of 77.58%, the amount of current assets increased only by 60.65%. The credit policy of the enterprise is of high quality: in conditions of significant growth in revenue, the amount of receivables, the basis of which was the debt of buyers and customers, increased by only 45.29%.
The amount of cash and equivalents is growing from year to year and amounted to about 29 billion rubles. Considering the value of the absolute liquidity indicator, it can be argued that this indicator is too high - if the absolute liquidity of UTair’s largest competitor is only 19.99, then in Aeroflot PJSC this indicator was 24.95%. Money is the least productive part of assets, so if there are available funds, they should be directed, for example, to short-term investment instruments. This will allow you to receive additional financial income.
Due to the depreciation of the ruble, the value of inventories increased significantly due to an increase in the cost of components, spare parts, materials, as well as due to an increase in the cost of jet fuel despite a decrease in oil prices. Therefore, inventories grow faster than sales volumes.
The main factor in the growth of non-current assets is the increase in accounts receivable, payments for which are expected more than 12 months after the reporting date. The basis of this indicator is made up of advances for the supply of A-320/321 aircraft, which the company will receive in 2017-2018. In general, this trend is positive, as it allows the company to ensure development and increase competitiveness.
The company's financing policy is as follows:
Table 7 – Dynamics of sources of financial resources of PJSC Aeroflot in 2013-2015, million rubles.
|
Indicators |
Absolute deviation, +,- |
Relative deviation, % |
||||||
|
Authorized capital (share capital, authorized capital, contributions of partners) |
||||||||
|
Own shares purchased from shareholders |
||||||||
|
Revaluation of non-current assets |
||||||||
|
Reserve capital |
||||||||
|
Retained earnings (uncovered loss) |
||||||||
|
OWN CAPITAL AND RESERVES |
||||||||
|
Long-term borrowed funds |
||||||||
|
Deferred tax liabilities |
||||||||
|
Provisions for contingent liabilities |
||||||||
|
LONG-TERM LIABILITIES TOTAL |
||||||||
|
Short-term borrowed funds |
||||||||
|
Accounts payable |
||||||||
|
revenue of the future periods |
||||||||
|
Reserves for upcoming expenses and payments |
||||||||
|
SHORT-TERM LIABILITIES TOTAL |
||||||||
A clearly negative trend is a reduction in the amount of equity capital by 13.4 over the period under study due to a significant net loss in 2015 (Table 7). This means that the wealth of investors has decreased significantly, and the level of financial risks has increased due to the need to attract additional funds to finance the growing volume of assets.
As a result, the amount of long-term liabilities increased by 46%, and the amount of current liabilities by 199.31%, which led to a catastrophic decline in solvency and liquidity indicators. A significant increase in borrowed funds leads to an increase in financial costs for debt servicing.
Table 8 – Dynamics of financial results of PJSC Aeroflot in 2013-2015, million rubles.
|
Indicators |
Absolute deviation, +,- |
Relative deviation, % |
||||||
|
Cost of sales |
||||||||
|
Gross profit (loss) |
||||||||
|
Business expenses |
||||||||
|
Administrative expenses |
||||||||
|
Profit (loss) from sales |
||||||||
|
Income from participation in other organizations |
||||||||
|
Interest receivable |
||||||||
|
Percentage to be paid |
||||||||
|
Other income |
||||||||
|
other expenses |
||||||||
|
Profit (loss) before tax |
||||||||
|
Current income tax |
||||||||
|
Change in deferred tax liabilities |
||||||||
|
Change in deferred tax assets |
||||||||
|
Net income (loss) |
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In general, the process of generating the financial result was ineffective due to an increase in interest payable and other expenses by 270.85%, as well as an increase in other expenses by 416.08% (Table 8). A significant increase in the latter indicator was caused by the write-off of Aeroflot PJSC’s share in the authorized capital of Dobrolet LLC due to the termination of operations. Although this is a significant loss of funds, it is not a permanent expense, so it does not indicate anything negative about the ability to carry out uninterrupted operations. However, other reasons for the increase in other expenses may threaten the company's stable operations. In addition to the write-off of some shares, other expenses also increased due to leasing expenses, expenses from hedging transactions, as well as the formation of significant reserves. All this indicates ineffective risk management within financial activities.
Indicators
Absolute deviation, +,-
Current ratio
Quick ratio
Absolute liquidity ratio
Ratio of short-term receivables and payables
Liquidity indicators indicate serious problems with solvency already in the short term (Table 9). As stated earlier, absolute liquidity is excessive, which leads to incomplete use of the financial potential of the enterprise.
On the other hand, the current ratio is significantly below normal. If in UTair, the company’s direct competitor, the figure was 2.66, then in PJSC Aeroflot it was only 0.95. This means that the company may have problems paying current obligations on time.
Table 10 - Financial stability indicators of PJSC Aeroflot in 2013-2015.
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Indicators |
Absolute deviation, +,- |
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Own working capital, million rubles. |
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Coefficient of provision of current assets with own funds |
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Maneuverability of own working capital |
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Ownership ratio working capital reserves |
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Financial autonomy ratio |
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Financial dependency ratio |
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Financial leverage ratio |
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Equity agility ratio |
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Short-term debt ratio |
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Financial stability ratio (investment coverage) |
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Asset mobility ratio |
Financial autonomy also decreased significantly to 26% in 2015 from 52% in 2013. This indicates more low level protection of creditors and a high level of financial risks. Liquidity and financial stability indicators made it clear that the company's condition is unsatisfactory. Consider also the company's ability to generate positive financial results. Table 11 – Indicators of business activity of PJSC Aeroflot (turnover indicators) in 2014-2015.
In general, the turnover of the main elements of assets, as well as equity capital, increased (Table 11). However, it is worth noting that the reason for this trend is the growth of the national currency, which has led to a significant increase in ticket prices. It is also worth noting that asset turnover is significantly higher than in direct competitor UTair. Therefore, it can be argued that, in general, the operating process in the company is effective. Table 12 – Profitability (loss) indicators of Aeroflot PJSC
The company was unable to generate profit in 2015 (Table 12), which led to a significant deterioration in financial results. For every ruble of assets raised, the company received 11.18 kopecks of net loss. In addition, the owners received 32.19 kopecks of net loss for every ruble of invested funds. Therefore, it is obvious that the company's financial performance is unsatisfactory. 2. Thomas R. Robinson, International financial statement analysis / Wiley, 2008, 188 pp. 3. website – Online program for calculating financial indicators // URL: https://www.site/ru/ | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Let's consider the main methods of financial analysis of an enterprise. Let's talk in detail about what they are, identify their advantages and disadvantages, and also compare them with each other. All approaches to financial analysis can be roughly divided into quantitative and qualitative methods. Now let's take a closer look at each of the groups of methods.
Quantitative methods of financial analysis of an enterprise
Quantitative methods of financial analysis involve the calculation of a single integral indicator of the risk of bankruptcy of an enterprise. They can be divided into two large groups classical statistical methods and alternative methods. The key difference between these methods is the use of mathematical tools of different complexity: while for classical methods, as a rule, methods of mathematical statistics are used, then alternative methods use more complex methods artificial intelligence, genetic algorithms, fuzzy logic.
Integral methods of financial analysis
According to research conducted by scientists Aziz and Dear, to build models quantification financial condition of the enterprise in 64% of cases were used statistical methods, 25% artificial intelligence, 11% other methods.
In integral methods of financial analysis, the most common approaches are those related to the construction of multiple discriminant analysis models (MDA models) and models built on the basis of logistic regression (logit models).
The main goal of these models is to calculate an integral indicator based on the measurement of various financial ratios of the enterprise, on the basis of which the analysis can be carried out.
Popular Western MDA models for predicting bankruptcy risk were developed by Altman, Taffler, and Springate. Among the domestic MDA models we can highlight: Saifullin and Kadykov Model, Belikov-Davydova Model (Irkutsk State Economic Academy), Mizikovsky Model, Chelyshev Model.
Currently, in the West there is a decline in the use of MDA models for assessing the risk of bankruptcy of enterprises; increasing preference is given to logit models and models based on artificial intelligence (AI models), which allow taking into account various hidden patterns.
The table shows the frequency of using multiple discriminant analysis tools to build models for assessing the financial stability of enterprises. As can be seen from the table, currently only 29% of all studies use multiple discriminant analysis tools to build bankruptcy models.
Frequency of application of multiple discriminant analysis in constructing models of financial stability of an enterprise
Source: Hossari G. Benchmarking New Statistical Techniques in Ratio-Based Modeling of Corporate Collapse, International Review of Business Research Papers Vol. 3 No. 3 August 2007 P.152
Among the authors using logit models to assess bankruptcy risk are Olson, Begley, Ming, Watts, Altman, Sabato, Gruzchinsky, Joo Ha, Tehong, Lin, Piessa. Among the domestic logit models, we can highlight the models of Zhdanov and Khaidarshina.
Benefits modern logit models are:
- The ability to determine the probability of risk of bankruptcy of an enterprise,
- Quite high accuracy of results,
- Allows you to take into account the industry specifics of enterprise activities,
- Easy to interpret results.
Among the disadvantages of logit models can be distinguished:
- Not adapted to the Russian economy,
- The financial stability of the enterprise is not taken into account,
- The crisis process in the enterprise is not taken into account.
Rating (score) models are effective means financial monitoring of enterprises' activities. A distinctive feature of rating models is that indicators for financial ratios are obtained either using mathematical operations or are specified by an expert.
It should be noted that rating systems for assessing the financial condition of an enterprise are currently used two types.
The first type involves the classification of enterprises into several groups, the boundaries of which are pre-established by analysts and experts. To apply this methodology, financial statements from one enterprise are sufficient. TO this type These include the methods of Dontsova, Nikiforova, Litvin, Grafov, the Sberbank method for assessing the borrower’s creditworthiness and others. Of the foreign methods, the Argenti method (A-count) is widely used in practice.
The second type of methodology for determining an enterprise rating is based on comparison of financial ratios with a reference enterprise. The role of the standard is played by the company that has the best results from the entire sample of enterprises under study. These include the methods of I.G. Kukunina, A.D. Sheremet.
Alternative methods of financial analysis
Among the alternative methods of financial analysis of an enterprise, one can highlight the use of neural network methods, fuzzy logic, self-organizing maps, genetic algorithms, and evolutionary programming to build quantitative models for assessing financial condition.
Financial models of enterprises built on artificial intelligence, work effectively with ill-defined, incomplete and imprecise data. AI models for financial analysis of an enterprise are labor-intensive to develop due to the complex mathematical apparatus. In addition, the development is complicated by the need to analyze a large sample of data on enterprises, which is still insufficient in the young Russian economy.
Altman speaks in favor of statistical models in his work, where he proves that logit models and mda models more accurately predict the bankruptcy of an enterprise than neural networks ( Altman E.I., Marco G., Varetto F. (1994): Corporate Distress Diagnosis: Comparisons using Linear Discriminant Analysis And Neural Network (the Italian Experience) // J. Of Banking and Finance. Vol 18 No 3).
Qualitative methods of financial analysis of an enterprise
Qualitative methods Analysis of the financial condition of an enterprise does not involve the calculation of integral indicators; they are, as a rule, based on the use of expert knowledge, surveys, and ratio analysis. Qualitative methods of financial assessment of an enterprise can be divided into two main groups: ratio analysis, where the analysis of the enterprise is based on the calculation and analysis of financial and economic ratios that describe the activities of the enterprise from various aspects, and qualitative methods based on traditional analysis of financial statements.
Ratio Analysis
In Russia, at the moment, most systems for monitoring the activities of enterprises are based on coefficient analysis. Eg, the federal law“On insolvency (bankruptcy)” offers the calculation of 3 financial ratios for diagnosing the risk of bankruptcy: current liquidity ratio, working capital ratio, recovery/loss of solvency ratio. Or, for example, the former “Methodological guidelines for the analysis of the financial condition of organizations by employees of the FSFO of Russia when performing an examination” (the FSFO has now been disbanded) contain the calculation of 21 financial ratios.
The following disadvantages can be identified in coefficient analysis of enterprises:
- multiplicity of proposed sets of coefficients in the analysis makes it difficult to assess the state of the enterprise on their basis, as well as the development and implementation of management decisions.
- difficulty of justified standardization of coefficients. One of the key problems of ratio analysis is the interpretation of ratios in terms of the selected standards. In Russian conditions, the base of regulatory documents for assessing the financial condition of an enterprise is not yet sufficiently developed, and access to industry average standards is often limited (absent).
- there are no uniform formulas for calculating coefficients, often in different sources the same coefficients are called by different terms and have different calculation formulas.
Analytical methods of financial analysis
Analytical methods of financial analysis focus on Special attention analysis of the structure and dynamics of financial reporting items. It is based on a comparison of assets and liabilities over close payment horizons, an assessment of balance sheet liquidity, as well as an analysis of trends in changes in balance sheet items and the search for the reasons behind them.
In addition, the reliability of the financial statements of the enterprise, the quality of accounting at the enterprise are checked, the degree of compliance of the monetary valuation of assets and liabilities with their real market values is assessed, from the qualitative side, an assessment is made of business reputation, the level of management, the professionalism of personnel, the prospects for the development of the industry, the stage life cycle enterprises.
Horizontal analysis consists of constructing one or more analytical tables in which absolute indicators are supplemented by relative growth rates. The purpose of horizontal analysis is to identify absolute and relative changes in the values of various reporting items for a certain period, as well as to evaluate these changes. One of the options for horizontal analysis is trend analysis, i.e. comparison of these items for different periods, plotting changes in the time series of a balance sheet item to identify a trend. Vertical analysis consists of calculating the share of individual items in the balance sheet with its further assessment of changes.
Cash flow analysis consists of identifying the causes of a deficit or excess of funds, determining the sources of their receipt and the direction of expenditure for subsequent control over the current solvency of the enterprise.
One of the popular analysis methods internal state enterprise, taking into account the dangers and opportunities in external environment is a SWOT analysis. The advantage of using SWOT analysis is that it allows you to assess the external and internal environment in which the enterprise operates. Typically, SWOT analysis is used in strategic planning to assess the effectiveness of the current enterprise strategy. One of the disadvantages of SWOT analysis is its difficult formalization through quantitative indicators.
Comparison of methods for financial analysis of an enterprise
Comparative characteristics of the methods of financial analysis of an enterprise are presented in the table.
| Comparative characteristics | Quantitative | Quality | ||
| Statistical | Alternative | Coefficient methods | Analytical | |
| Multidimensional approach | + | + | — | + |
| Use of source data from external public reporting | + | + | + | + |
| Visualization and ease of interpretation of results | + | + | — | — |
| Possibility of comparison with other companies | + | + | + | — |
| Easy to calculate | + | — | + | — |
| Taking into account the time factor | + | + | + | — |
| Taking into account correlation factors | + | + | — | — |
| Qualitative assessment of the calculated integral indicator | + | + | — | — |
| Expert is used | — | + | — | + |
| Take into account the specifics of the organization | — | — | — | + |
| High accuracy of bankruptcy risk assessment | + | + | — | — |
| Accounting for quality indicators | — | — | + | + |
| External factors are taken into account | — | — | — | + |
Summary
We examined the main methods of financial analysis of enterprises used in practical activities. Each approach has its own advantages and disadvantages, so it is necessary to use a comprehensive set of methods or functional use each of the approaches. This is what will allow them to be used effectively in the financial analysis of the enterprise.
Insufficient financial stability may lead to a lack of funds to finance current or investment activities, and excess will hinder development, increasing capital turnover periods and reducing profits. Financial analysis allows us to substantiate the parameters of such sustainability. It not only makes it possible to judge the current position of the enterprise, but also serves as the basis for developing strategic decisions that determine the development prospects of the company.
Managing any object requires, first of all, knowledge of its initial state, information about how the object existed and developed in the periods preceding the present. Only by obtaining sufficiently complete and reliable information about the activity of an object in the past, about the prevailing trends in its functioning and development, can one develop confident management decisions, business plans and development programs for objects for future periods. The stated position applies to enterprises and firms, regardless of their role, scale, type of activity, or form of ownership.
In a market economy, it is especially important to determine financial stability of enterprises, that is, the state of financial resources in which an enterprise can freely maneuver funds in order to, through their effective use, ensure an uninterrupted process of production and sales of products, as well as incur costs for expanding and updating the production base.
Determining the boundaries of financial stability of enterprises is one of the most important problems in market economy. Insufficient financial stability can lead to the insolvency of organizations, a lack of funds to finance current or investment activities, and bankruptcy, while excessive financial stability will hinder development, leading to the appearance of excess inventories and reserves, increasing capital turnover periods, and reducing profits.
The parameters of such stability can be substantiated the financial analysis. Such an analysis not only makes it possible to judge the situation of the enterprise at the moment, but also serves as the basis, a necessary prerequisite for the development of strategic decisions that determine the development prospects of the company.
We also note that where there is a high culture of enterprise management, any annual and even quarterly report on the activities of the enterprise is accompanied by a financial analysis of its activities.
Analysis of the financial and economic activities of enterprises is associated with processing of extensive information, characterizing the most diverse aspects of the functioning of an enterprise as a production, financial, property, and social complex. Most often, this data is concentrated in financial reporting documents, the enterprise’s balance sheet, and accounting statements. Thus, accounting data serves as the documentary and information basis for analyzing the financial condition and economic activities of enterprises. These data themselves allow us to make judgments about the state of affairs at the company, but in-depth analysis also requires their processing.
As is known, Accounting at enterprises it is carried out not only in for the purpose of reflecting business transactions and transactions carried out by the enterprise, recording cash assets, income, and sources of their formation. Financial reporting data is used in the process of developing, justifying, and making management decisions. Planning the direction and areas of activity, development of the enterprise, development and implementation of projects of an innovative and production profile, organizational and personnel measures to improve the activities of the enterprise, increase work efficiency in one way or another are related to the preliminary analysis of reporting.
The main purpose of financial analysis— obtaining several basic, most informative parameters that give an objective and accurate picture of the financial condition of the enterprise, its profits and losses, changes in the structure of assets and liabilities, in settlements with debtors and creditors. Such information can be obtained as a result of a comprehensive analysis of financial statements using scientifically based methods.
The result of financial analysis is an assessment of the state of the enterprise, its property, assets and liabilities of the balance sheet, the rate of capital turnover, and the profitability of the funds used.
Analysis of the financial position of an enterprise allows you to track trends in its development, give a comprehensive assessment of economic and commercial activities and, thus, serves as a link between the development of management decisions and the production and entrepreneurial activities themselves.
Who uses the analysis results and how?
Various types of business analysis and their results are widely used by a wide variety of stakeholders.
Typically, in business activities, a distinction is made between financial accounting and management (accounting) accounting. Financial Accounting is based on accounting information that, in addition to being used within the company by management, is communicated to those outside the organization. Management Accounting covers all types of accounting information that is measured, processed and communicated for internal management use. The division of accounting that has developed in practice gives rise to a division of analysis into external and intra-economic analysis.
External financial analysis can be carried out by interested parties. The basis for such an analysis is mainly the official financial statements of the enterprise, both published in the press and presented to interested parties in the form of a balance sheet. For example, to assess the stability of a particular bank, the client looks at the banks’ balance sheets and, based on them, calculates certain indicators for comparison with stable banks. But, unfortunately, a complete, comprehensive analysis cannot be done due to the incompleteness and limited information presented in the financial and accounting documentation.
External analysis includes analysis of absolute and relative indicators of profit, profitability, balance sheet liquidity, solvency of the enterprise, efficiency of use of borrowed capital, and general analysis of the financial condition of the company.
In contrast to him internal financial analysis necessary and carried out in the interests of the enterprise itself. On its basis, control is exercised over the activities of the enterprise, not only over financial activities, but also over organizational ones, and further ways of production development are outlined. The basis for such an analysis are the financial documents (reports) of the enterprise itself, this is the balance sheet in extended form, all kinds of financial reports, not only for a certain date (month, year), but also current ones, which allows you to have a more accurate description of the affairs and stability of the enterprise. The main direction of internal financial analysis is analysis of the effectiveness of capital advances, the relationship of costs, turnover and profit, the use of borrowed capital, and equity. In other words, all aspects of the enterprise’s economic activities are studied. Often certain areas of such analysis may be trade secrets.
Based on the types and purposes of the analysis, it is possible to identify a conditionally external and internal circle of people interested in such information.
TO external circle of people usually include users with direct and indirect financial interests, and internal first of all the administration.
The first group of people includes users with the so-called direct financial interest m: investors, creditors, suppliers, buyers and clients, business partners. Based on data from public financial statements, they draw conclusions about the profitability and liquidity of the company, what the company's financial prospects are in the future, whether it is worth investing in it, and whether the company has the money to pay interest and repay debts on time.
Investors evaluate a company's potential profitability because it determines the value of the investment (the market value of the company's equity shares) and the amount of dividends the company will pay. The lender evaluates the company's potential to repay loans.
Users of financial analysis with indirect financial interest include government agencies and extra-budgetary funds, tax authorities, investment institutions, commodity and stock exchanges, insurance organizations, and firms performing external audits.
Information about the financial activities of enterprises is necessary for this group to monitor compliance by enterprises with obligations to the state, the correct payment of federal and local taxes, to resolve issues of tax benefits, methods and means of privatization and corporatization of an enterprise. State regulatory bodies, based on the results of financial analysis, develop generalized synthetic estimates that make it possible to judge the situation not only of one or several enterprises, but also of the industry as a whole and the region.
Companies listed on investment funds and stock exchanges must submit special financial reports to them. In addition, users of information with an indirect financial interest include auditors and accounting firms, financial consultants, lawyers and law firms, the press and news agencies, and the public.
TO internal users The results of financial analysis include the administration. Administration- these are the owners and management personnel of the company who bear full responsibility for managing the activities of the enterprise and achieving its goals.
The successful activities of the administration are based on correctly adopted management decisions arising from the analysis of accounting data.
The activities of the administration of any enterprise are aimed at achieving a system of goals. However, in a competitive environment, all efforts must be focused on the two main goals of any business: profitability (profitability) and liquidity. Profitability is the ability to earn a profit sufficient to attract and retain investment capital. Liquidity is the availability of sufficient means of payment to pay debts on time. As is known, the relationship between these indicators is often inverse: the higher the profitability, the lower the liquidity.
The administration must constantly have the following data on the financial and economic activities of the enterprise: the amount of net profit for the reporting period, the correspondence of the rate of profit to the expected results, the availability of sufficient funds, a list of the most profitable products, the cost of each product produced. Based on available information, leaders and managers make management decisions.
As you can see, the range of users of financial analysis and areas of their application is very wide. At the same time, users of financial information may be interested in certain various aspects of the enterprise’s activities. This circumstance predetermines the need for not only an integrated, but also a comprehensive approach to analyzing the activities of an enterprise for internal and external use.
The administration is not limited only to internal financial analysis, but, if possible, complements it with external analysis, carried out by certain specialized firms. This is due not only to the fact that “one knows better from the outside,” but also to a greater breadth of analysis, carried out taking into account the competitiveness of other companies and therefore making it possible to evaluate oneself in an unbiased, comprehensive manner, which will allow one to more accurately formulate the primary objectives of one’s development.
