FINANCIAL ANALYSIS, PLANNING & CONTROL

Dr. H. ROMLI M. KURDI, SE, MSi

as reflected in the financial records and reports • External analysis is performed by outsider • Internal analysis is performed by corporate finance and accounting department. and a symptom of problem . and is more detailed than external analysis.What is Financial Analysis ?? • Financial Analysis is the process of determining the significant operating and financial characteristics of a firm from accounting and financial statements • The goal of such analysis is to determine the efficiency and performance of the firm. • Analyst must be careful to distinguish between the cause of problems.

• To compare different companies in the same industry • To compare different industries • To compare performance in different time periods . Once the symptom have been located.FINANCIAL STATEMENTS ANALYSIS • FINANCIAL RATIOS • Financial ratios are used to locate symptom of problems. financial analyst must determine the cause of any problem. then he/she must find a solution for it • A ratio may be defined as a fixed relationship in degree or number between two numbers (variables).

complete measure of performance : risk ratios (1&2). Activity ratios. measure the position of growth • Valuation ratios.4. return ratios (3. which measure management’s overall effectiveness as shown by the return generated on sales and investment • Growth ratios. Profitability ratios. Liquidity ratios. which measure how effectively the firm is using its resources • 4.5) . which measure the firm’s ability to meet its maturing short-term obligations • 2. which measure the extent to which the firm has been financed by debt • 3.BASIC TYPES OF FINANCIAL RATIOS • 1. Leverage ratios.

Liquidity Ratios : • CURRENT RATIO • Dividing current assets by current liabilities • QUICK RATIO • Calculated by deducting inventories from current assets and dividing the remainder by current liabilities .

T) + debt repayment/ (1 .T). • Time interest Earned. are defined as interest plus annual long term lease obligation (profit before taxes + interest charges + lease obligation) : ( interest charges + lease obligation) • Cash flow coverage = cash inflows : (fixed charges + preferred stock/(1 . is called Debt to Equity Ratio • Total Debt to Total Assets. measure the percentage of total funds provided by creditors. generally called Debt Ratio. . is determined by dividing EBIT by interest charges • Fixed charge coverage.Leverage Ratios : • Which measure the funds supplied by creditors as compared with the financing provided by the firm’s owners. Debt include current liabilities.

Ratios all involve comparison between level of sales and the investment in various asset accounts (acc. fixed assets and others. the ratio of sales to fixed assets = Sales/Net fixed assets Total Assets Turnover = Sales/Total Assets . • Inventory turnover. defined as sales divided by average-inventory • Receivable turnover.. – Average Collection Period = Receivables/Sales per day = ….Activity Ratio • Measure how effectively the firm employs the resources at its command. Days. receivables. defined as credit sales divided by average receivable. inventories. • Average collection period : – Sales per day = Sales/360 = \$ ……. Fixed Assets Turnover.

measure the return on total investment (ROI) • Return on Net Worth = Net income/Net worth  ROE .Profitability Ratio • Profitability is the net result of a large number of policies and decisions • It answer about how effectively the firm is being manage • Profit Margin on Sales = Net Income/Sales • Operating Profit Margin = Operating profit/Sales • Gross Profit Margin = Gross profit/Sales • Return on Total Assets = Net income/Total Assets.

as they reflect the combined influence of risk ratio and return ratio – Price to Earnings Ratio = Price/Earnings – Market to Book Ratio = Market Value/Book Value Du Pont System of Financial Analysis It brings together the activity ratio and profit margin on sales. measure the performance of the firm. and show these ratios interact to determine the profitability of assets ROI = (profit/sales) X (sales/investment) Extending Du Pont System to include leverage : ROE = ROI : % of assets financed by net worth . DPS) = (ending value : beginning value) = CVIF r. EPS.Growth Ratio & Valuation Ratios • Growth ratio measure how well the firm is maintaining its economic position in the general economy (ie : sales. net income. N • Valuation Ratios.

as well as its lender and investors) and for using those funds. an increase in stockholder’s equity b. The source must equal the uses. and changes in net working capital Let exercise ………………………………………. a decrease In stockholders’ equity 2. uses. but cash is excluded. Three format of Statement : • • • . 1. an increase in liabilities. Uses are : an increase in assets. Measuring Changes in Net Working Capital This format has 3 categories : sources. This format has two categories : sources and uses. Balancing Sources and Uses.FUNDS FLOW ANALYSIS  SOURCES AND USES OF FUNDS ANALYSIS • • • The determination of the sources of cash flowing into the firm and the uses of that cash by the firm provides a comprehensive views of a firm’s receipts and outlay useful for monitoring how well a firm realize its established plans for obtaining funds (from its sales. uses. and changes is the cash balance This format consider current accounts as part of the sources and uses profile. 3. Measuring Changes in Cash This format has 3 categories : source. The rule are : a. Sources are : a decrease in assets. a decrease in liabilities.

Long term borrowing -Sale of fixed assets • Net Income plus noncash expenses Accounting Basis xxxx xxxx xxxx xxxx …….Make up losses • .Pay cash dividend ..FUNDS FROM OPERATION THE FUNDS COME FROM THE EVERYDAY BUSINESS OF THE FIRM • Sales minus cash expenses Cash Basis Sales xxxx Less cash expenses xxxx Less non cash exp (dep) ……… EBIT ……… Cash remaining xxxx Less interest payment xxxx Less taxes xxxx Net Income ……… Cash remaining xxxx Add back non cash expenses ………+ Funds from operation xxxx • Other Sources : .sale of stock .Purchase of fixed assets . Xxxx xxxx xxxx ……… xxxx + xxxx Other Uses : .Pay off liabilities .

moving average. exponential smoothing 3.( x ) ( x ) av Y b av X 1/n = (Ending Value/Beginning Value) 1 b = a = 4.ANTICIPATING THE FUTURE >>> FORECASTING • • • Forecasting is the prerequisite to planning in any organization (company) Forecasting offers information about the future to be used in decision making Approaches : 1. Expert opinion 2. Causal Model . Growth Model .Regression Y = a + bx n  xy .(x )( y ) ---------------------------------n  x x . Trends : trend line.

. Isolate those balance sheet items that can be expected to vary directly with sales 2.B/TR (TR) A/TR (TR) .B/TR (TR) . (TR2) Total Funds needed External Funds Needed A/TR B/TR TR m b TR2 = = = = = = assets as percent of sales current liabilities as percent of sales change in total revenue or sales net profit margin (NIAT per sales) earnings retention ratio total sales (revenues) projected for the year Let exercise ………………………………………………………………. Step : 1.m. The items are tabulated as percentage of sales 3.. Put in equation form : = = A/TR (TR) . assets utilization or needed.b. .PERCENT OF SALES METHOD • • • The most important variable that influence a firm financing requirements is its projected Rp (\$) volume of sales A good sales forecast is an essential foundation for forecasting financial requirement.

A retrenchment. designed to minimize required capital outlays.WHAT IS FINANCIAL PLANNING ?? Financial Planning is a process of : • Analyzing the interactions of the financing and investment choices open to the firm. look at total capital investment outlay Alternatives : 1. focus on aggregate investment by division or line of business. An aggressive growth plan. • Projecting the future consequences of present decision. gradual liquidation of divisions 4. in order to avoid surprises and understand the links between present and future decisions • Deciding which alternatives to undertake (these decisions are embodied in the final financial plan) • Measuring subsequent performance against the goal set in the financial plan Different kind of planning : • Short-term financial planing (horizon not longer than 12 months) • Long-term financial planning (horizon is 5 years). Divestiture. entry new market 2. increase existing market. calling for heavy capital investment and new product. A normal growth. which the division growth with its market 3. sale or liquidation of the division .

because the more the firm pays dividend. Pro Forma Statements. The plan will present pro forma (forecasted) : balance sheet. income statements. This plan include of a discussion dividend policy. statements describing sources & uses of funds. for mandated expenditures.BASIC ELEMENTS OF PLAN & REQUIREMENT Elements : 1. Finding the Optimal Financial Plan Approach : FINANCIAL PLANNING MODEL . Forecasting 2. Planned Financing. Planned capital expenditure are broken down by category : investment for replacement. for expansion. for new products. Strategy by division or line of business 3. 2. Capital Expenditure and Business Strategy. Requirements : 1. the more capital it will have to find from sources other than retained earnings.

FINANCIAL MODEL EQUATIONS INCOME STATEMENT EQUATION : 1.FC .DEP .1. D 4.VC . REV DEP = a.TAX REV = Sales (a.DEP .1.2.1.TAX = REV . = interest rate) (a.INT .ADM .ADM . NET = REV . TAX = a.3.3. = percent) (a. FA VC = a.CGS .DEP .DEP . CGS = a.INT) 5.INT . (REV .CGS .INT) a. REV = Forecast by model user 2.VC .3.FC .2. REV 3.1. REV FC = specified by model user ADM = a. (REV. INT = a. = taxes rate) .1.

OCF = NET + DEP 7. DIV = a. NET = OCF +  D + SI . = dividend pay out ratio) .4.OCF . D 9. SI = specified by model user =  NWC + INV + DIV .DIV = NWC .OCF .4.  NWC = OCF +  D + SI .Sources and Uses Funds Statement Equations : 6.INV (accounting identity) (accounting identity) (accounting identity) (accounting identity) (accounting identity) (accounting identity) (accounting identity) (a.FA ( -1) 11.INV . NWC .D ( -1) 8.NWC ( -1) 10.DIV = DEP + FA . INV = specified by model user = OCF +  D + SI .  D =  NWC + INV + DIV .SI = D . NWC .

DIV =  E Note : ( -1) = previous year Let Exercise !!! .DEP FA ( -1) + INV . REV a. FA = = = 14.DEP (accounting identity)  D + D ( -1) (accounting identity) a.DIV (accounting identity) NET . TA E ( -1) + NET .1.1. E = a. FA a.BALANCE SHEET EQUATIONS 12. NWC = = = 13. REV NWC ( -1) +  NWC (accounting identity) a. D = = = 15.1. REV FA ( -1) +  FA >>  FA = INV .1.1.