Summary
We can define Financial Analysis as the set of techniques used to diagnose the situation and prospects of the company. The fundamental purpose of financial analysis is to be able to make appropriate decisions at the company level. These techniques are mainly based on the information contained in the financial statements and are intended to make a diagnosis of the company that allows conclusions to be drawn on the progress of the business and its future evolution.
Summary
We can define the Financial Analysis as a set of techniques used to diagnose the situation and prospects of the company. The fundamental purpose of financial analysis is to take appropriate measures in the field of business decisions. These techniques are based primarily on information contained in the financial statements and aim to make a diagnosis of the company to allow conclusions about the performance of the business and its future evolution.
Introduction
We can define Financial Analysis as the set of techniques used to diagnose the situation and prospects of the company. The fundamental purpose of financial analysis is to be able to make appropriate decisions at the company level. These techniques are mainly based on the information contained in the financial statements and are intended to make a diagnosis of the company that allows conclusions to be drawn on the progress of the business and its future evolution.
The analysis must provide perspectives that reduce the scope of the guesswork, and therefore the doubts that they plan when it comes to deciding. With the analysis, large masses of data are transformed into selective information, helping to make decisions in a systematic and rational way, minimizing the risk of errors. Financial analysis is not only relevant for those who carry out financial responsibility in the company. Its usefulness extends to all those agents interested in the company, its current situation and its foreseeable evolution. Therefore we distinguish two different perspectives in what concerns the analysis:
Internal perspective: financial analysis will be of paramount importance to those who run the company. Through analysis they will be able to make decisions that correct imbalances, as well as analyze and anticipate both risks and opportunities. In short, the correct knowledge of the variables, economic, financial of the company will allow its daily management in addition to planning its future development.
The financial aspects of a company
There are many reasons to understand and evaluate the financial aspects of a company. For owners and executives, an understanding of the financial aspects is essential for making good decisions in the future. Potential investors may also be interested in the financial aspects of a company as a means of obtaining tools to help them predict future returns. (Pedraza 2006)
To develop a financial plan, some elements of financial policy must be considered, such as:
- The investment required by the company in new assets The degree of financial leverage The amount of cash to be paid to shareholders The amount of working capital and liquidity that are required on an ongoing basis.
What is financial planning?
The authors (Stephen et al., 1996) define financial planning as the statement of what is intended to be done in the future, and must take into account expected growth; the interactions between financing and investment; investment and financing options and lines of business; the prevention of surprises by defining what can happen in the face of different events and the feasibility of objectives and goals.
For his part, Weston (2006) states that financial planning implies the preparation of sales, income and asset projections based on alternative production and marketing strategies, as well as the determination of the resources needed to achieve these projections.
Others define it (Brealey and Myer, 1994) as a process of analysis of the mutual influences between investment and financing alternatives; projection of the future consequences of the present decisions, decision of the alternatives to be adopted and finally comparison of the subsequent behavior with the objectives established in the financial plan.
Financial planning is a technique that brings together a set of methods, instruments and objectives in order to establish in a company forecasts and economic and financial goals to be achieved, taking into account the means available and those required to achieve it.
It can also be said that financial planning is a three-phase procedure to decide what actions should be taken in the future to achieve the objectives set: plan what you want to do, carry out what was planned and verify the efficiency of how it was done.. Financial planning through a budget will give the company a general coordination of operation.
For the author, financial planning is a process of estimating the demand for resources (purchases, assets, labor, sales, etc.) based on the different possible alternatives to achieve the goals, using financial and mathematical tools and techniques.
Financial planning is an aspect that is of great importance for the operation and, therefore, the survival of the company.
There are three key elements in the financial planning process:
- Cash planning consists of preparing cash budgets. Without an adequate level of cash and despite the level presented by the profits, the company is exposed to failure. Profits planning is obtained through pro forma financial statements, which show anticipated levels of income, assets, liabilities and capital Social. Cash budgets and pro forma statements are useful not only for internal financial planning; they are part of the information required by both present and future lenders.
Relative importance of the analysis of financial statements
They are an indispensable component of most decisions about loans, investments and other upcoming issues.
The importance of financial statement analysis lies in that it facilitates decision making for investors or third parties who are interested in the economic and financial situation of the company.
It is the main element of the entire set of decisions that interests the person responsible for the loan or the investor in bonds. Its relative importance in the set of investment decisions depends on the circumstances and the market moment.
The types of financial analysis are internal and external, and the types of comparisons are cross-section analysis and time series analysis.
The main environments regarding the financial evaluation of the company:
- Profitability: It is the efficiency of the applied capital. This concept usually relates the result of capital to the risk of that investment. Solvency: It is the ability of the company to meet its payments. In the very short term this is measured by liquidity. Analyzing solvency is checking whether the company will be able to pay its debts. Efficacy: Combination of productive factors that allows the company to achieve its objectives. Efficiency: Combination of productive factors that allows the company to achieve its objectives at the lowest possible cost (naturally, the minimum optimal cost is a somewhat ideal goal and therefore the reader should not be so demanding either.) Guarantee: Capacity or sufficiency of real assets to respond to the debts of the company.
The productive capacity His techniques of interpretation are 2:
Analysis and comparison.
Objective of the financial statements
It is providing useful information to investors and credit grantors to predict, compare and evaluate cash flows.
Provide users with information to predict, compare and evaluate the profit generating capacity of a company.
Basic financial statements
The main financial statements that help to know the financial situation of a company are the following:
- Balance sheet. Income statement. Statement of changes in the financial situation. Statement of changes in capital.
1.-General balance
It is the financial statement that shows the assets, liabilities and stockholders' equity of a company as of a given date. This financial statement shows how the assets of a company are distributed (assets), how much is owed (liabilities), if the debts are short or long term, how much money have the partners invested in the company (shareholders' equity), etc..
2.-Income Statement
The financial statement that shows the income and expenses of a company for a certain period.
Unlike the Balance Sheet, this is a dynamic financial statement, since it covers operations from one date to another date, within the same year. In other words, the Income Statement shows the total amount of income and expenses from the first to the last day of the period covered.
3.- Statement of changes in the financial situation based on cash
This financial statement shows the changes of a company regarding the distribution of its economic resources, as well as its obligations and its capital.
Like the income statement, it is a dynamic financial statement, since it shows the changes suffered in a given period.
4.-Statement of changes in stockholders' equity
As its name implies, this financial statement shows the existing changes in the integration of stockholders' equity, such is the case of increases in share capital, accumulated profits, dividends paid, etc.
Like the income statement and the statement of changes in the financial situation, it is a dynamic financial statement, that is, it shows the changes suffered in a given period.
conclusion
The financial statements reflect the entire set of concepts and operations of the company, all the information shown in them must be used to know all the resources, obligations, capital, expenses, income, costs and all the changes that were made in them or at the end of the financial year, also to support the planning and management of the business, decision-making, analysis and evaluation of those in charge of management, exercise control over the internal economic items and to contribute to the evaluation of the impact this has. on external social factors.
These should be useful for making investment and credit decisions, measuring the company's liquidity and solution, as well as its ability to generate resources and evaluating the origin and characteristics of financial resources as well as their performance.
Bibliographies
- Quintero Pedraza, JC: «Financial Planning» in Contributions to the Economy, October 2009 Weston, T., (2006) Fundamentals of Financial Administration. Vol II and III, Havana, Editorial Félix Varela.Brealey, R. and S. Myer, (1994) Foundation for Business Financing. Third Part, fourth edition, Mexico, Editorial McGraw Hill.Ross, S.; Westerfield, R. and B. Jordan, (1996) Fundamentals of Corporate Finance. First edition in Spanish of the second in English. Madrid, Mosby-Doyma Libros, SA
