Conducting a financial analysis

THINGS TO KNOW

The most common method of interpreting and analysing accounts is through ratio analysis. The objective being to compare results of companies/divisions over a particular period. Quite often, budgeted results are compared with actual results.

All users of financial information are interested in the same basic information with different emphasis on certain categories of ratios.

Analysis of financial statements involves comparison and interpretation of ratios. Analysts do not use ratios in isolation. Other factors that must be considered when analysing an enterprise include:

• The sector of the industry within which the enterprise operates
• The quality of the workforce and the state of Industrial relations
• Research and Development activity
• Government legislation pending
• Conditions in the economy generally
  
  

 

Most banks and enterprise agencies now offer a free health check-up. Check out your local financial institution’s website and see if you can access these check-ups.

Liquidity refers to the availability of cashflow. It is often a challenging aspect for start-up businesses. You may find yourself with plenty of new sales orders but with restricted access to cash and therefore a restriction to your ability to meet sales demands. So while it is very tempting to take on a lot of new orders, it is wise to continually check your cashflow and ensure that you have capacity to deliver on these orders.

Solvency refers to a situation where your liabilities are greater than your assets. It may arise if your stock loses value, or your equipment and fixtures and fittings become obsolete or no longer fit for purpose.

Sometimes you might be faced with a new competitor to the marketplace. How will this new competitor affect the value of your stock if you are no longer the only or primary seller? One way to assess the impact of this and examine whether or not it is likely to happen is to look at the ‘ease of entry’ to the marketplace. Government legislation can impact the length of time and process to enter this market. If so, you will have an advantage if you are already operating in that market. It will also give you a chance to adapt or change your product so that your stock keeps its value, and you maintain your market share.