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Cash-flow Statement
The cash-flow statement is one of the most important documents for making
management decisions. While the company can look profitable based on
standard accounting methods, the cash-flow statement tells managers whether
the company has cash to pay its bills over the short-term.
Net income and earnings can be manipulated to paint a healthy financial picture,
but the cash-flow statement presents the reality of the companys ability to
maintain operations. A drop in the companys operating cash-flow ratio should
trigger a red flag, indicating business managers need to reassess pricing,
inventory, overhead, debt, and other short-term decisions to improve the
companys cash position.
The Financial statements of a company or individual are the documents that reflect the historic
financial information of the entity. This includes a detailed and accurate record of the assets and
liabilities as well as the income and expenses and also the cash flow of the entity.
The Balance sheet - this is a record of the assets and liabilities on a given date. The Income
statement - this is a record of the income and expenses for the reporting period. The Cash Flow
statement - this is a record of the sources and application of funds that includes operating,
investment, and financing activities and how they impacted on the cash position during the
reporting period.
The Purpose of Financial Statements
The purpose of the conducting measurements and making evaluation is to provide answers to the
following questions:
Why there are no excess funds available? Are the reporting entity financially sound? Would it be
possible to make further loans? Will available cash generating be sufficient to provide in the
anticipated demand?
The format and type of information obtained during this process will depend on the intended
users of the information.
The conducting measurements and the making of evaluation process basically consists of the
rearranging of the information in order to obtain information in a format that can be used to
appraise the performance, activities, financial health, stability and growth potential.
In order to conduct a proper evaluation and interpretation of financial statements the following
important steps needs to be followed.
Conduct a superficial analysis of the financial statements in order to obtain an initial feeling for
the areas that needs special attention. Conduct an evaluation of the flow of funds in order to
establish the ability of the entity to generate cash as well as the needs for funds. Conduct a ratio
analysis in relation to Rentability also sometimes called profitability,Risk and Growth Analysis
of non-financial information
Conclusion
From the above introduction to financial statements it is clear that not all the information
necessary to make sound financial decisions is readily available form these statements. A
number of ratios need to be calculated and compared with others to enable the decision maker to
draw the correct conclusions. It should be remembered that the financial statements reflect the
historic activities and that decisions are taken about the future. This can only be done by drawing
conclusions about trends of the different ratios rather than the actual historic numbers.
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1Why Management Accounting Is Important in Decision-Making
2General Uses of Accounting Information
3The Differences Between Financial Accounting & Management Accounting
4The Advantages of Management Accounting
Accounting provides management with data needed to determine whether a business is at a loss or a profit,
how much debtors owe, how much a business owes others, and other financial information. Accounting
measures business transactions and as such can help steer managers in the right direction with solid
information, not gut-feelings. Basically accounting is a tool for management to employ to help make sound
business decisions on a timely manner. For instance, if by using accounting information, managers notice that
the trend is for sales to decrease, then they can take measures to stop this trend. Maybe they need to change
prices or decrease expenses to handle the down-trend. The key is that accounting gave them the clue that
something may not be going according to plan, playing an important role in business management.
1. Get your cash numbers. Cash is the most important business asset. Managers should use accounting
information to see where the business is cash-wise and to plan for financing and other strategies for short-term
and long-term planning. For example, if the cash balance is $50,000 and there is a need for a large purchase of
$120,000 for equipment, a manager may decide to finance the entire purchase instead of using the $50,000
balance. Many managers and business owners use ratios to analyze financial data. For example current ratio, a
popular way to verify how a business is able to meet its short-term debt, is calculated by dividing current assets
by current liabilities. The higher this ratio, the better off a firm is.
2. Mind your budget, which is an estimate of income and expenses for a certain point in time. It is a guide to
ensure that a business is on track, as planned. Managers should be aware of budget numbers and how they
compare to actual numbers. For example, if a postage expense number is almost over budget, managers can
research the reason for the excessive expense in that line item and make decisions about that. If actual versus
budget reports show a trend towards more expensive inventory costs, then managers may consider
renegotiating terms or prices or even changing suppliers.
The Role Of Financial Statements In Business Decision
Making
Financial statements, one of the most important aspect of any business which provide a clear picture
of the companys financial health for a particular period of time and also at any given point in
time.Financial statements are the best gears which provide vital information about the company
When it comes to decision making, decision makers are required to make several process decision
which help to increase the overall profitability of the business. They have many tools which help
them take decision but the most important of all are the financial statements which give a good
understanding of the companys financial position. To make sound business decisions, even the
most basic types of financial statements and the ability to interpret the numbers behind them are
immensely essential. Lets discuss the role of financial statements in business decision making.
statement are the four basic financial statements. Most of the businesses prepare these basic
statements which are used primarily by investors, creditors, and other external decisions makers.
These four financial statements summarize the overall financial activities of the business.
The management of the company is time and again required to take several decisions with regards
to formulating plans and policies for the future. Hence to take such decision they need to evaluate
the past performance of the company. Financial statements in such cases provide the decision
makers with a clear picture of the required period of time, helping them take necessary decisions
2. Holding Of Share
Shareholders being the owners of the company need to time and again take decision whether they
want to continue with the holdings of the companys share or sell them out. The annual financial
statement provides the shareholders with meaningful information to take such decisions.
3. Expansion Of Credit
The creditors or the lenders are the providers of loan capital to the company. They use the entire set
of information provided in the financial statements to determine whether they should or restrict the
extent of credit to a business. They also decided the interest rates of the loans give to the company
4. Investment Decision
Prospective investors who have surplus capital to invest in profitable opportunities look for financial
information of the company they are looking to invest in. To decide whether or not to invest their
capital in the companys share, the financial statement play an important role in providing useful
Financial statements help the decision makes to make taxation decisions. By giving vital information
based on the assets or income, the decision makers can derive the information from the financials.
They can take decision to save taxes based on these financial statements.
The financial statements play a number of different roles. And each and every role depends largely
upon who is reading the information and which financial statements are being examined. Hence
Business decisions when based on financial data become the most important parameter which
should also be accurate and relevant. iSN Global Solutions document sourcing team have rich
experience in Sourcing Of Financial Documents. We are the right people to find out valuable
financial data which is most accurate and relevant for your business. Contact Us for our
Mike Periu
President, Proximo, LLC
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Financial health is one of the best indicators of your business's potential for long-
term growth. The Federal Reserve Bank of Chicago's recent Small Business
Financial Health Analysis
The first step toward improving financial literacy is to conduct a financial analysis
of your business. A proper analysis consists of five key areas, each containing its
own set of data points and ratios.
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1. Revenues
Revenues are probably your business's main source of cash. The quantity,
quality and timing of revenues can determine long-term success.
3. Operational Efficiency
Operational efficiency measures how well you're using the companys resources.
A lack of operational efficiency leads to smaller profits and weaker growth.
Debt to equity (debt equity). The definitions of debt and equity can
vary, but generally this indicates how much leverage you're using to
operate. Leverage should not exceed what's reasonable for your
business.
5. Liquidity
Liquidity analysis addresses your ability to generate sufficient cash to cover cash
expenses. No amount of revenue growth or profits can compensate for poor
liquidity.
The final part of the financial analysis is to establish a proper basis for
comparison, so you can determine if performance is aligned with appropriate
benchmarks. This works for each data point individually as well as for your
overall financial condition.
The first basis is your companys past, to determine if your financial condition is
improving or worsening. Typically, the past three years of performance is
sufficient, but if access to older data is available, you should use that as well.
Looking at your past and present financial condition also helps you spot trends.
If, for example, liquidity has decreased consistently, you can make changes.
The second basis is your direct competitors. This can provide an important reality
check. Having revenue growth of 10 percent annually may sound good, but if
competitors are growing at 25 percent, it highlights underperformance.
The final basis consists of contractual covenants. Lenders, investors and key
customers usually require certain financial performance benchmarks. Maintaining
key financial ratios and data points within predetermined limits can help these
third parties protect their interests.
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Trends. Create trend lines for key items in the financial statements over multiple time periods, to
see how the company is performing. Typical trend lines are for revenues, the gross margin, net
profits, cash, accounts receivable, and debt.
Proportion analysis. An array of ratios are available for discerning the relationship between the
size of various accounts in the financial statements. For example, one can calculate a company's
quick ratio to estimate its ability to pay its immediate liabilities, or its debt to equity ratio to see if
it has taken on too much debt. These analyses are frequently between the revenues and expenses
listed on the income statement and the assets, liabilities, and equity accounts listed on the balance
sheet.
Financial statement analysis is an exceptionally powerful tool for a variety of users of financial
statements, each having different objectives in learning about the financial circumstances of the
entity.
Creditors. Anyone who has lent funds to a company is interested in its ability to pay back the debt,
and so will focus on various cash flow measures.
Investors. Both current and prospective investors examine financial statements to learn ab out a
company's ability to continue issuing dividends, or to generate cash flow, or to continue growing
at its historical rate (depending upon their investment philosophies).
Management. The company controller prepares an ongoing analysis of the company's financial
results, particularly in relation to a number of operational metrics that are not seen by outside
entities (such as the cost per delivery, cost per distribution channel, profit by product, and so
forth).
Regulatory authorities. If a company is publicly held, its financial statements are examined by the
Securities and Exchange Commission (if the company files in the United States) to see if its
statements conform to the various accounting standards and the rules of the SEC.
There are two key methods for analyzing financial statements. The first method is the use of
horizontal and vertical analysis. Horizontal analysis is the comparison of financial information
over a series of reporting periods, while vertical analysis is the proportional analysis of a
financial statement, where each line item on a financial statement is listed as a percentage of
another item. Typically, this means that every line item on an income statement is stated as a
percentage of gross sales, while every line item on a balance sheet is stated as a percentage of
total assets. Thus, horizontal analysis is the review of the results of multiple time periods, while
vertical analysis is the review of the proportion of accounts to each other within a single period.
The second method for analyzing financial statements is the use of many kinds of ratios. You
use ratios to calculate the relative size of one number in relation to another. After you calculate
a ratio, you can then compare it to the same ratio calculated for a prior period, or that is based
on an industry average, to see if the company is performing in accordance with expectations. In
a typical financial statement analysis, most ratios will be within expectations, while a small
number will flag potential problems that will attract the attention of the reviewer.
There are several general categories of ratios, each designed to examine a different aspect of a
company's performance. The general groups of ratios are:
1. Liquidity ratios. This is the most fundamentally important set of ratios, because they measure the
ability of a company to remain in business. Click the following links for a thorough review of each
ratio.
o Cash coverage ratio. Shows the amount of cash available to pay interest.
o Current ratio. Measures the amount of liquidity available to pay for current liabilities.
o Quick ratio. The same as the current ratio, but does not include inventory.
o Liquidity index. Measures the amount of time required to convert assets into cash.
2. Activity ratios. These ratios are a strong indicator of the quality of management, since they reveal
how well management is utilizing company resources. Click the following links for a thorough
review of each ratio.
o Accounts payable turnover ratio. Measures the speed with which a company pays its suppliers.
o Accounts receivable turnover ratio. Measures a company's ability to collect accounts receivable.
o Fixed asset turnover ratio. Measures a company's ability to generate sales from a certain base of
fixed assets.
o Inventory turnover ratio. Measures the amount of inventory needed to support a given level of
sales.
o Sales to working capital ratio. Shows the amount of working capital required to support a given
amount of sales.
o Working capital turnover ratio. Measures a company's ability to generate sales from a certain base
of working capital.
3. Leverage ratios. These ratios reveal the extent to which a company is relying upon debt to fund its
operations, and its ability to pay back the debt. Click the following links for a thorough review of
each ratio.
o Debt to equity ratio. Shows the extent to which management is willing to fund operations with
debt, rather than equity.
o Debt service coverage ratio. Reveals the ability of a company to pay its debt obligations.
o Fixed charge coverage. Shows the ability of a company to pay for its fixed costs.
4. Profitability ratios. These ratios measure how well a company performs in generating a profit.
Click the following links for a thorough review of each ratio.
o Breakeven point. Reveals the sales level at which a company breaks even.
o Contribution margin ratio. Shows the profits left after variable costs are subtracted from sales.
o Gross profit ratio. Shows revenues minus the cost of goods sold, as a proportion of sales.
o Margin of safety. Calculates the amount by which sales must drop before a company reaches its
break even point.
o Net profit ratio. Calculates the amount of profit after taxes and all expenses have been deducted
from net sales.
o Return on equity. Shows company profit as a percentage of equity.
o Return on net assets. Shows company profits as a percentage of fixed assets and working capital.
o Return on operating assets. Shows company profit as percentage of assets utilized.
While financial statement analysis is an excellent tool, there are several issues to be aware of
that can interfere with your interpretation of the analysis results. These issues are:
Comparability between periods. The company preparing the financial statements may have
changed the accounts in which it stores financial information, so that results may differ from
period to period. For example, an expense may appear in the cost of goods sold in one period, and
in administrative expenses in another period.
Comparability between companies. An analyst frequently compares the financial ratios of different
companies in order to see how they match up against each other. However, each company may
aggregate financial information differently, so that the results of their ratios are not really
comparable. This can lead an analyst to draw incorrect conclusions about the results of a company
in comparison to its competitors.
Operational information. Financial analysis only reviews a company's financial information, not
its operational information, so you cannot see a variety of key indicators of future performance,
such as the size of the order backlog, or changes in warranty claims. Thus, financial analysis only
presents part of the total picture.
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Financial analysis
June 17, 2014
Financial analysis is the examination of financial information to reach business decisions. This
analysis typically results in the reallocation of resources to or from a business or a specific
internal operation. This type of analysis applies particularly well to the following situations:
Investment decisions by external investor. In this situation, a financial analyst or investor reviews
the financial statements and accompanying disclosures of a company to see if it is worthwhile to
invest in or lend money to the entity. This typically involves ratio analysis to see if the
organization is sufficiently liquid and generates a sufficient amount of cash flow. It may also
involve combining the information in the financial statements for multiple periods to derive trend
lines that can be used to extrapolate financial results into the future.
Investment decisions by internal investor. In this situation, an internal analyst reviews the
projected cash flows and other information related to a prospective investment (usually for a fixed
asset). The intent is to see if the expected cash outflows from the project will generate a sufficient
return on investment. This examination can also focus on whether to rent, lease, or purchase an
asset.
The key source of information for financial analysis is the financial statements of a business.
The financial analyst uses these documents to derive ratios, create trend lines, a nd conduct
comparisons against similar information for comparable firms.
Financial analysis is one of the key tools needed by the managers of a business to examine how
their organization is performing. For this reason, they are constantly querying the financial
analyst about the profitability, cash flows, and other financial aspects of their business.
Steven Bragg
Financial Analysis
Business Finance
There are a number of techniques you can use to perform financial statement analysis for your
business firm, depending on what you are trying to find out. The financial statements you want to
use in your analysis is the balance sheet, income statement, and statement of cash flows. First,
you need to know how to prepare the financial statements. After learning preparation, financial
analysis comes next. Here are some techniques to use to analyze your financial statements:
1
Trend Analysis
Trend analysis is also called time-series analysis. Trend analysis helps a firm's financial manager
determine how the firm is likely to perform over time. Trend analysis is based on historical data
from the firm's financial statements and forecasted data from the firm's pro forma, or forward-
looking, financial statements.
One popular way of doing trend analysis is by using financial ratio analysis. If you
calculate financial ratios for a business firm, you have to calculate at least two years of ratios in
order for them to mean anything. Ratios are meaningless unless you have something to compare
them to, in this case other year's of data. Trend analysis is even more powerful if you have and
use several years of financial ratios.
2
Common Size Financial Statement Analysis
Common size financial statement analysis is analyzing the balance sheet and income
statement using percentages. All income statement line items are stated as a percentage of sales.
All balance sheet line items are stated as a percentage of total assets. For example, on the income
statement, every line item is divided by sales and on the balance sheet, every line item is divided
by total assets. This type of analysis enables the financial manager to view the income statement
and balance sheet in a percentage format which is easy to interpret.
If you look at this income statement, for example, you can develop a common size income
statement. If you calculate the percentage that net income is of total sales, the formula is
$64,000/$1,000,000 = 6.4%. You can apply that formula to every line item on the income
statement to develop your common size income statement. As with financial ratio analysis, you
can compare the common size income statement from one year to other years of data to see how
your firm is doing. It is generally easier to make that comparison using percentages rather than
absolute numbers. More
3
Percentage Change Financial Statement Analysis
Percentage change financial statement analysis gets a little more complicated. When you use this
form of analysis, you calculate growth rates for all income statement items and balance sheet
accounts relative to a base year. This is a very powerful form of financial statement analysis.
You can actually see how different income statement items and balance sheet accounts grew or
declined relative to grows or declines in sales and total assets.
Here is an example of percentage change analysis. Let's say that XYZ, Inc. has $500 in inventory
on its balance sheet in 2011 and $700 in inventory on its balance sheet in 2012. How much has
inventory grown in 2012? The formula to calculate the growth rate in inventory is the following:
Change in inventory/Beginning inventory Balance = $200/$500 = 0.40 = 40%. The change in
inventory for XYZ, Inc. in 2012 is 40%.
If you do a percentage change analysis for all balance sheet and income statement items, you can
see how helpful it would be to the financial manager.
4
Benchmarking
Benchmarking is also called industry analysis. Benchmarking involves comparing a company to
other companies in the same industry in order to see how one company is doing financially
compared to the industry. This type of analysis is very helpful to the financial manager as it helps
to see if any financial adjustments need to be made.
Financial ratio analysis are usually used for benchmarking analysis. Financial ratios for other
companies can be obtained from a number of sources. Here is an excellent source of industry
average ratios. You can also obtain industry average ratios from Value Line and Dun and
Bradstreet.
In order to do benchmarking, you compare the ratios for one company to the ratios for other
companies in the same industry. You have to be sure that the industry average ratiosare
calculated in the same way the ratios for your company are calculated when you do
benchmarking.
Using these four financial statement analysis techniques help a financial manager know where
a business firm is financially both internally and as compared to other firms in the industry.
Together, they are powerful analysis tools that will help every business firm stay solvent and
profitable.
Financial Planning in Six Steps
FPSBs Financial Planning Process consist of six steps that financial planning
professionals use to consider all aspects of a clients financial situation when
formulating financial planning strategies and making recommendations. Scroll
down to learn about each step in the process.
The steps in the financial planning process are as follows:
Sophomore Year
THE FINANCIAL PLANNING PROCESS
Junior Year
Most people want to handle their finances so that
Senior Experience
they get full satisfaction from each available
dollar. Typical financial goals include such things
Post-Graduation
as a new car, a larger home, advanced career
training, extended travel, and self-sufficiency
Research Center
during working and retirement years.
Sound Advice To achieve these and other goals, people need to
identify and set priorities. Financial and personal
New York Times satisfaction are the result of an organized
process that is commonly referred to as personal
money management or personal financial
planning.
Personal financial planning is the process of
managing your money to achieve personal
economic satisfaction. This planning process
allows you to control your financial situation.
Every person, family, or household has a unique
financial position, and any financial activity
therefore must also be carefully planned to meet
specific needs and goals.
A comprehensive financial plan can enhance the
quality of your life and increase your satisfaction
by reducing uncertainty about your future needs
and resources. The specific advantages of
personal financial planning include
Increased effectiveness in obtaining, using, and
protecting your financial resources throughout
your lifetime.
Increased control of your financial affairs by
avoiding excessive debt, bankruptcy, and
dependence on others for economic security.
Improved personal relationships resulting from
well-planned and effectively communicated
financial decisions.
A sense of freedom from financial worries
obtained by looking to the future, anticipating
expenses, and achieving your personal economic
goals.
Evaluating Risk
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Six Steps in the Financial Planning Process
To develop a solid financial plan, it's important to cover all your bases. Heres
how:
From start to finish, a CFP professional is required take you through the
financial planning process to help you achieve your financial goals.
The Personal Financial Planning Process Identifies Financial Goals and Objectives And Creates
A Plan For Achieving Them
The financial planning process is very individual and personal. Financial planning
should focus on all the psychological and financial factors that may have an impact on
your financial goals and objectives. In short, personal financial planning provides you
with a long-term strategy for your financial future, taking into consideration every
aspect of your financial situation and how each affects your ability to achieve your goals
and objectives.
Personal financial planning can help you construct the foundation on which to build a
secure financial future. Through six distinct steps in the financial planning process,
financial planners help you:
o Things to consider
o Helping hand
o FAQs
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How it works
Its important to make sure you are comfortable that your financial
planner has taken the time to understand your needs, goals and
preferences before they make any recommendations. Here is what you
can expect from the financial planning process.
Your financial planner should explain the process they will follow, find out your needs and make
sure they can meet them. You can ask them about their background, how they work and how
they charge.
You work with your financial planner to identify your short and long term financial goals this
stage serves as a foundation for developing your plan.
ASSESSING YOUR FINANCIAL SITUATION
Your financial planner will take a good look at your position your assets, liabilities, insurance
coverage and investment or tax strategies.
Your financial planner recommends suitable strategies, products and services, and answers any
questions you have.
Once youre ready to go ahead, your financial plan will be put into action. Where appropriate,
your financial planner may work with specialist professionals, such as an accountant or solicitor.
Your circumstances, lifestyle and financial goals are likely to change over time, so its important
that your financial plan is regularly reviewed, to make sure you keep on track.