Financial analysis and reporting involve evaluating financial data to understand an organization’s performance and make informed decisions. Here are the main components:
1. Financial Statements
- Balance Sheet: Provides a snapshot of an organization’s assets, liabilities, and equity at a specific point in time.
- Assets: What the company owns (e.g., cash, inventory, property).
- Liabilities: What the company owes (e.g., loans, accounts payable).
- Equity: The residual interest in the assets after deducting liabilities.
- Income Statement: Shows the company’s performance over a period by summarizing revenues, expenses, and profits or losses.
- Revenue: Income earned from sales of goods or services.
- Expenses: Costs incurred to generate revenue (e.g., cost of goods sold, operating expenses).
- Net Income: The difference between total revenue and total expenses.
- Cash Flow Statement: Tracks the flow of cash in and out of the company, categorized into operating, investing, and financing activities.
- Operating Activities: Cash generated or used in daily business operations.
- Investing Activities: Cash used for or generated from investments in assets.
- Financing Activities: Cash flows from or to investors and creditors (e.g., issuing stock, paying dividends).
- Statement of Changes in Equity: Shows changes in equity over a period, including contributions, distributions, and retained earnings.
2. Financial Ratios
- Liquidity Ratios: Assess the ability to meet short-term obligations.
- Current Ratio: Current assets divided by current liabilities.
- Quick Ratio: (Current assets – Inventory) divided by current liabilities.
- Profitability Ratios: Measure the ability to generate profit.
- Gross Margin: Gross profit divided by revenue.
- Net Profit Margin: Net income divided by revenue.
- Return on Assets (ROA): Net income divided by total assets.
- Return on Equity (ROE): Net income divided by shareholder equity.
- Efficiency Ratios: Evaluate how effectively the company uses its assets.
- Inventory Turnover: Cost of goods sold divided by average inventory.
- Accounts Receivable Turnover: Net credit sales divided by average accounts receivable.
- Leverage Ratios: Assess the level of debt relative to equity or assets.
- Debt to Equity Ratio: Total liabilities divided by total equity.
- Interest Coverage Ratio: Earnings before interest and taxes (EBIT) divided by interest expense.
3. Trend Analysis
- Purpose: Identifying patterns over time to forecast future performance.
- Method: Comparing financial statements across multiple periods.
4. Comparative Analysis
- Benchmarking: Comparing financial performance with industry standards or competitors.
- Ratio Comparison: Analyzing how ratios compare with those of similar companies.
5. Budget Variance Analysis
- Purpose: Comparing actual financial performance with budgeted figures to understand deviations.
- Types of Variance: Favorable (better than budgeted) or unfavorable (worse than budgeted).
6. Cash Flow Forecasting
- Purpose: Predicting future cash flows to ensure liquidity and financial stability.
- Method: Projecting cash inflows and outflows based on historical data and future expectations.
7. Financial Reporting
- Internal Reporting: For management to make operational decisions.
- External Reporting: For stakeholders such as investors, creditors, and regulators.
8. Compliance and Regulations
- Standards: Adhering to accounting standards (e.g., GAAP, IFRS) and regulatory requirements.