1. Introduction to Financial Analysis
Chapter 13
Introduction to Financial Analysis

2. Financial Analysis
Use the financial statements created to evaluate financial health of a company
Liquidity
Ability of company to meet its current financial obligations
Solvency
Confidence that company will survive to do business
Profitability
Measures ability of company to earn owners a return on investment

3. Comparative Financial Statements
Compare financial statements of two or more years
Cash has increased, A/R decreased, a desirable trend
Inventory is up, but that may indicate more future sales
Fixed Assets increase indicates investment in resources for future
Decrease in both short and long-term liabilities – good!
Higher equity for the owner and a larger, more prosperous company.

4. Condensed Statement Analysis
Use major totals only to draw conclusions
COGS increasing at alarming rate
Consider reviewing suppliers, inventory policies

5. Condensed Statement Analysis
owner has clearly reduced his equity by either withdrawing more or incurring a loss during 200b.
At the same time the owner has taken on much more debt.
This trend is a dangerous one if it continues.
Company less liquid as current assets are decreasing as a percentage of total assets.
Accounts Receivable and Inventory are growing but at the expense of Cash.
Overall, while the company is bigger, the owner has less claims on the assets.

6. Trend Analysis Compare accounts over a number of years
While sales have increased, cost of good sold have increased at greater rate
Consider reviewing purchasing policies, inventory control

7. Ratio Analysis
Mathematical formulas which give insight on parts of the company

8. Liquidity Ratios

9. Solvency Ratios

10. Profitability Ratios

11. Comparison with Similar Businesses
Success in an industry means comparison with competitors
Company B may have more in inventory and difficulty collecting A/R
However, Company A may have too much tied up in cash
Also useful are industry averages

12. Non-Financial Factors
Strengths and weaknesses of company
Quality of personnel/management
Legal considerations, e.g., patents, pending law suits
Threats from inside (e.g., union demands)
Threats from outside (e.g., technology)
Opportunities to expand business
Many more

13. Budgeting Financial plan for a specific period
Reflects goals of the organization
Assist management in decision making
Budgets are prepared and approved
Actual results compared and differences determined
Manager responsible for results

14. Types of Budgets Master Budget: overall company budget
Other may include:
Sales budget (set targets)
Expense budget (control costs)
Capital budget (estimate purchases)

15. Budget Process Management decides on specific budgets
Sets goals/priorities
Assign managers to budgets
Budgets prepared
Budgeted income statement and balances sheets prepared
Top management approves budgets

16. Factors influencing Budgets
Nature of the product or service
General economic conditions
Availability of resources, funding, staff
Estimate future costs
Company goals
Staff capabilities
Competition
Government

17. Budgeted Income Statement

18. Budgeted Balance Sheet