Scribd
Upload
8 views16 pages

Chapter 2

Uploaded by

karthinathan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
8 views16 pages

Chapter 2

Uploaded by

karthinathan
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPTX, PDF, TXT or read online on Scribd
You are on page 1/ 16

Chapter-2

Financial Analysis and Planning

1
Meaning Financial Analysis

• Financial analysis (also referred to as financial statement analysis or


accounting analysis or Analysis of finance) refers to an assessment of the
viability, stability and profitability of a business, sub-business or project.
• It is performed by professionals who prepare reports using ratios that make
use of information taken from financial statements and other reports. These
reports are usually presented to top management as one of their bases in
making business decisions.
• In the words of Myers, ―Financial statement analysis is largely a study
of relationship among various financial factors in a business as disclosed by a
single set of statements and a study of the trends of these factors as shown
in a series of statements. Analysis of financial statements may be compared
to x-raying the financial position to diagnose the financial strength and
weakness of the business.
2
Financial analysts often assess the following
elements of a firm
• Profitability
• Solvency
• Liquidity
• Stability

3
2.1.1.Need of Analysis of Financial Statement

• To know the financial information from the financial data.


• It also helps to make a forecast for the future which helps us to prepare
budgets and estimates
• It helps us to know the reasons for relative changes—either in profitability or
in the financial position as a whole.
• It also helps to know both the short-term liquidity position vis-a-vis working
capital position; as also the long-term liquidity and solvency position of a
firm.
• It also highlights the operating efficiency and the present profit-earning
capacity of the firm as a whole.

4
2.1.1.Need of Analysis of Financial Statement

• High Courts, Supreme Court, Arbitrators also require financial statements to


settle various disputed matters.
• Various financial journal (viz. Bank Bulletins), newspapers etc. also require
financial statements for analyzing and scrutinizing the financial position of a
firm for the readers.
• To assess the risk (both financial as well as business) involved with firm.
• To assess the present earning capacity of the firm for the purpose of inter-
firm comparison and thereby to assess the progress or otherwise of the firm

5
2.2 Sources of Financial Data

• Balance Sheet
• Income Statement
• The Statement of Cash flows

6
2.1.3. Approaches to financial analysis and
interpretation

7
Tools, or Techniques or Methods of Financial Analysis

• For analyzing the financial data and interpreting them in a systematic manner
and a number of techniques or tools are available.
• These are as follows:
1. Comparative financial statements
2. Common-size statement analysis.
3. Trend analysis.
4. Average analysis
5. Ratio analysis
6. Fund flow analysis
7. Cash flow analysis

8
Trend Analysis or Trend Ratios

• Trend analysis evaluates an organization's financial information over a period


of time. Periods may be measured in months, quarters, or years, depending
on the circumstances. The goal is to calculate and analyze the amount change
and percent change from one period to the next.

Trend Ratios
• Trend ratios can be defined as the index numbers of the movements of the
various financial items on the financial statement for a number of periods.

9
Calculate trend percentage

10
Ratio Analyses

In order to understand the importance of ratio analysis in financial analysis, the


following short term solvency can be considered
• Current Ratio
Current Ratio = Current Assets / Current Liabilities

Liquid Ratio
• Liquid Ratio = Liquid Assets/Current Liabilities
• Liquid assets = Current Assets – Stock

11
2.2 Financial Planning (Forecasting)

Definition of Financial Planning


• Financial Planning is the process of estimating the capital required and
determining it’s competition. It is the process of framing financial policies in
relation to procurement, investment and administration of funds of an
enterprise.
• Objectives of Financial Planning:
• Determining capital requirements
• Determining capital structure
• Framing financial policies
• A finance manager ensures that the scarce financial resources are maximally utilized in
the best possible manner

12
2.3. The Financial Planning Process

• Project financial statements.


• Determine the funds needed to support the five-year plan.
• Forecast funds availability over the next five years.
• Establish and maintain a system of controls to govern the allocation and use
of funds within the firm.
• Develop procedures for adjusting the basic plan if the economic forecasts.
• Establish a performance-based management compensation system

13
Sales Forecast – Importance

14
External Financing

• External financing in business refers to the money borrowed from banks or


investors. It is essentially external because it is not generated from within the
business but instead comes from an outside source. When it comes to the
overall finances of a company, external financing is important as it can help a
company grow.

• The external financing needed, or EFN, is the amount of financing the


business requires from outside sources to remain profitable. EFN is important
to understand since it depicts the exact amount the company needs to
borrow from lenders and other outside sources.

15
External Financing

EFR is calculated with the help of following formula, when other ratios remain
constant:
• External Financing Needed = Increase in Assets - Increase in Liabilities -
Retained Earnings
• For example, if a business is looking to expand its physical property, it will
need to consider the amount of external financing needed. If it is expanding
the property by about 25%, it may also calculate the expenses by this
amount. So, if its assets are $200,000 and liabilities at $100,000, the increase
of 25% would be $50,000 and $25,000 respectively. If, for example, the
retained earnings are projected at $15,000, then the formula would be
written as:
• $10,000 (External Financing Needed) = $50,000 (Increase in Assets) - $25,000
(Increase in Liabilities) - $15,000 (Retained Earnings)
16

You might also like