Financial analysis, Symptoms, reasons, decisions - Financial decisions in business management

Financial Analysis

Financial Analysis is the process of identifying important properties of an organization by examining its accounting data and financial reports. This is science, and a kind of art, requiring not only profound knowledge and skills, but also intuition. The purpose of the analysis is to investigate unfavorable trends and mistakes, identify weaknesses and strength factors, and identify new opportunities for the organization. In other words, we are talking about one of the types of management diagnostics. The analyst logically and consistently calculates efficiency, liquidity, financial leverage and other parameters of the firm.

Before proceeding with the diagnosis, you need to determine what for and for whom it will be produced. In the diagnosis of a firm, anyone who has at least some interest in the firm can be interested. Analysis is external and internal, i.e. produced by an independent external analyst or own forces. In the first case, the company can be examined by creditors, shareholders, investors, bankers, tax police, competitors, potential partners and many others. In this case, diagnostics can be very expensive. In the second case, the specialists of the firm and hired experts are engaged in this task on the instructions of its management with a view to making managerial decisions.

Symptoms, causes, solutions

Financial analysis is not an end in itself, and not the only way to identify problems and formulate the company's prospects. There are other qualitative and quantitative methods of analysis. Sometimes even such & quot; strange & quot; symptoms, like the appearance of the plant or the condition of its toilets, can tell a lot about the problems of the firm. It is important to distinguish symptoms from causes. Causes that cause the same symptom of the company's low profitability can be many. And if you try to influence the symptoms, it is unlikely that you will be able to rectify the situation. Examples of symptoms, problems and possible solutions are given in Table. 3.1. A more detailed listing and description of symptoms of problems in firms is given in the appendix. Sometimes, to identify the reasons for the company's difficulties, it is necessary to analyze not only its activities, but also external objects: partners, legislation, consumers, etc.

Table 3.1

Symptoms of the firm's problems, their causes and possible solutions identified through financial analysis

Symptom

Hypotheses about problems

Possible solutions

Unusual

coefficient

Liquidity

Inadequate cash.

Too large bills receivable. Reserves are too large.

Too large current liabilities

Raise additional funds.

Introduce a more stringent policy of demanding payments.

Improve inventory management.

Get new long-term funding

Abnormal

coefficient

Profitability

High production costs.

Many free assets.

Inadequate sales.

Inadequate prices. High administrative costs. Too high interest on debt

Take action to reduce costs.

Sell redundant and (or) obsolete assets.

Strengthen marketing and sales departments.

Strengthen advertising. Edit prices.

Reduce administrative costs.

Look for sources of cheaper borrowed funds.

Attract new share capital, etc.

Commercial banks that deal with the problems of analyzing different firms in their daily practice,

developed a whole system of early warning symptoms about the brewing problems of the firm. Interesting tests for the diagnosis of firms are compiled by government control bodies and insurance companies. Fragments of the lists of such symptoms are presented in the Appendix. A vivid example of this trend in banking is the Basel process.

A business person should be able to analyze the actions of any partner and market agent with which he has to deal: a commercial bank, an insurance company, an enterprise, domestic and foreign partners, etc. The analysis can be proactive, search, control, "disassembly", warranty ... It can only be financial. It is important to understand that financial analysis is only one of the most important methods of general-purpose diagnostics. The question of the methodology of diagnosis is worthy of a separate book. In this edition, we will only cover this matter in a concise manner.

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