Finance is an important tool for analysis and decision-making in today's economy, financial policies and measures captivate the attention of businessmen, investors, rulers and even the people in general.
Economic globalization has made the world a sensitive problem, in fact all economies, even the most powerful are affected by any change that may occur in terms of prices or speculation in international trade.
It is vitally important that professionals in this field have the necessary knowledge to face the challenges and transformations that future life imposes, and that they know how to defend our interests both nationally and internationally. This material provides information regarding the economic-financial analysis as an instrument for evaluating business management, as well as definitions and concepts that will help to understand the different contemporary financial trends.
The work consists of an introduction, development, and analyzed bibliography.
Introduction
The purpose of business economics is to study the economic aspects, establishing and formulating equilibrium laws that are specifically applied at the microeconomic level of the company, which constitutes a requirement within the company's development and improvement.
Currently, the economy is heading towards a great goal to develop the activities of companies regardless of their corporate purpose, which consequently would result in meeting the needs of the population, however market conditions, influenced by the economy. international, and hegemonic policies make it increasingly difficult to study companies.
The scope of the business market is characterized as the most significant element, the existence of undercapitalized companies, a company in a state of bankruptcy for technical and financial reasons that evidently represents insufficiency in its working capital. It is then necessary to develop and implement the study of finance as a field that addresses financial decisions, based on accounting information that leads to decision-making in this regard.
The financial function as an instrument for evaluating business management
Companies are economic units, around which a complex system of economic relations is established that determine the characteristic features, peculiarities, rights and duties that constitute it.
It is the primary link and the base of the complex system of relations of the national and international economy that are characterized by:
- Technical, economic, internal and objective cohesion in the production process. Territorial unit that allows the greatest rationality of its organization, planning, control and administration. Relative independence that allows it to be differentiated from the other nuclei of the economy and that are specified in a given Autonomous and operational economy in its management. Financial independence. It expresses the independence that the company has to buy and sell its products as a way to obtain resources and thus be able to create the necessary funds for its management and fulfill the need to cover its expenses, income and leave a profit margin. responsible for reporting information to your higher body.
Another characteristic that distinguishes the company is the material responsibility that is expressed in that it must respond to:
- Care and rational use of the available resources. Ensure compliance with the discipline of technology, administration and finance. Ensure the cadres and the overcoming or training of these with a view to their improvement and the proper use of skills installed, human, etc.
In this way the relationship between the individual and collective interests of the workers is strengthened, in other words, the company as an economic unit develops a specific activity of society, where economic relations are established first with the state financial and planning, with other companies and finally, with the workers; in which the fulfillment of the tasks and established norms is manifested, materialized in the exchange of experiences, the stimulation, by the results of the production and the supply of means of production and services.
It should be borne in mind that the company can be defined from a different point of view, since it is studied by different scientific disciplines. Thus, the company can be defined according to:
- Psychological Legal Legal
The object of analysis of this work will be from the economic point of view that includes a set of coordinated productive factors, whose function is to produce and its purpose is determined by the system of social and economic organization in which it is immersed.
Currently the study of business economics has been developed as a result of the development that occurs in the business world, disciplines dedicated to the study of very specific aspects are increasing, which until recently, were only mentioned or they devoted a few pages to general business economics programs.
From the point of view of the economy in general, the company is defined according to a succession in time of investment and financing projects.
A company arises to meet unsatisfied demand, for which it is necessary to invest in goods, current assets, fixed assets, etc., and at the same time the availability of financial resources must be taken into account.
The company can survive and grow, as long as the profitability of its investments exceeds the cost of the capital it used to finance them.
Knowing and evaluating an entity requires distinguishing two situations:
- When it comes to the financial situation of a company, reference is made to other aspects such as: ability to pay, that is, evaluating whether it has enough money to meet its obligations, possibilities of paying off its debts, mobilizing its resources, etc. If we talk about economic results, we are referring to the company's ability to generate income above its cost and achieve a higher level of profitability, taking into account the resources it has used to obtain this benefit.
The result obtained by an entity during a certain period is related to the accounting record of all the operations that have basically taken place, income and expenses during that period. The analysis will then reflect the extent to which it can generate income greater than disbursements, in general, it is a matter of knowing the efficiency with which said entity performs.
Analysis and evaluation of financial management
The accounting issues general information about the economic entity through the financial statements, essentially:
- Balance sheet Result status Statement of changes in financial position
Through accounting, economic operations and events can be measured, in addition to communicating the corresponding information to those interested.
From an external point of view, financial analysis represents the analysis of the entity's position vis-à-vis suppliers such as:
- Commercial creditors: Your main interest is related to the analysis of the short-term liquidity or capacity of the company and the fulfillment of your obligations with the providers of goods and services. Banking and bondholders: Your interest is in the capacity of cash flow of the company that can generate for medium and long-term obligations, then its analysis is directed to the capital structure, to the different sources and use of funds (origin and application of funds), to profitability of the company over time and future projections of profitability. The common shareholders: they are interested in their part in the current profits and those that are expected in the future, especially analyzing their trend.He is also interested in the financial position to ensure the strategy of the policy of distribution of profits and particularly that of dividends, as well as that related to avoiding bankruptcy.
From an internal point of view, it focuses its attention on the responsibility of the company's progress and its purpose, to satisfy the expectations of capital providers. In reality, analysis is needed to plan and control the future in both the medium and long term. In fact, they are interested in finding the weak points of the entity, as well as providing them as close as possible to reality to users, so that they are used to analyze and interpret correctly.
The analysis as a method of knowledge achieves the breakdown of each of the elements that make up the whole, allows us to know the causes that have influenced the changes in the object analyzed and therefore the weaknesses and strengths.
The financial statements by themselves are not sufficient to explain what are the weaknesses of an entity, nor to show how a certain operation has been registered; what has been the profitability of the company, its ability to pay, what items have influenced the increases and decreases in cash. They only constitute the most suitable way to know the trajectory, development, current situation of the company and also project the future despite its limitations that may arise.
Economic Analysis Characterization
In Cuban entities, as in the rest of the world, the financial economic analysis is of great importance, at the current times in which the economy is found, it has a vital significance as a tool to assess the efficiency of companies, based on the fact that through From it you can study and know the situation of the company, thus allowing you to evaluate the fulfillment of the tasks expressed in the plan, as well as to guide yourself to what extent you should work to improve the indicators, achieve greater economic efficiency, determine the possibilities of development and improvement of production and management methods taking into account the results obtained.
The objectives of the analysis can be described as follows:
- Increase the activity of the company and the results to be achieved by it. Discover reserves that increase the volume and quality of production. Growth in labor productivity and profitability. Spread the best experiences. Determine existing deficiencies during the development of the work and the projection according to the plan of averages to forecast them. Examine the behavior of the fundamental indicators in the fulfillment of the plan. Detect the causes that have influenced the fulfillment of the production plan, the decrease in costs, if the increase in the profitability and strengthening of the financial situation of the company.Develop measures aimed at the use of discovered reserves.Control the timely implementation of these measures.
The analysis of economic activity must be taking into account the criteria analyzed:
Operational: It must be executed immediately after receipt of the plan compliance data.
Systematic: The analysis of the achievements and deficiencies in the work must be carried out permanently in a determined interval of time.
Real and concrete: Its status as a figure must show the results of the plan's fulfillment, the causes of its non-compliance and contribute to the efficient use of the reserve and improvement of the work.
Objective: The results of the company activity should be valued from the general state interests, in the final results of the work.
Economic analysis influences the company in fulfilling the main task of the industry, the expansion and improvement of the industrial base of the economy, the raising of the technical level and the effectiveness of final production, those methods that are of decisive importance They agree to the centralized management taking into account the principles of financial self-management and the material interest of the company group, for the achievement of the results obtained in the economic activity of the entity. Hence, analysis is an essential means of monitoring the progress of compliance with the economic plan. In fact, economic analysis is a research tool that serves to clarify the principles of:
- Ensure the fullest satisfaction of the needs of all members of society. There is a unity of objective and task in all factors of the national economy. There is no trade secret. Accuracy of ownership of statistical data and other economic information.
The objective of the economic analysis also covers the economic processes of the company and other dependencies of the economy of a country, which is formed under the influence of objective and subjective factors and which receive the corresponding reflection through the economic information system. Its relevance is that in-depth comprehensive analysis makes it possible to objectively evaluate the progress of the fulfillment of the plan's task, enables the improvement of the company's work, helps to determine the possibility of development and improvement of production, services and management method, is based on the fact that it constitutes an indispensable means of the company economy and an integral part of the new management methods.
Due to its importance, economic analysis for the development of the economy fulfills other tasks such as:
- Promulgate advanced experience in different sectors and branches of the economy. Assessment of the quality of planning, compliance with the plan. Evaluation of the efficiency in the use of labor, material and financial resources. Delimitation of the causes of the deviation from the plan that depends on the company.
Financial Analysis Characterization
Unlike economic analysis, it is the transformation of financial data into a form that can be used to control the financial position of the company, make plans for future financing, assess the need to increase productivity, and determine the additional financing required.
The study of the balance, from the financial point of view, aims to check the ability of the company to meet payment obligations. Under this operating concept, it is considered according to the degree of liquidity or ability of its items to be converted into cash, while the liability according to the greater or lesser monetary demand of its item over time.
The financial analysis tries to determine the most beneficial way to obtain the capital necessary for the development of the company and to regulate the activity of the same, so that its financial balance is maintained. It also allows knowing the origin of the funds necessary for it. The asset is made up of the investment objects that are the elements required for its operation, that is, the origin of the funds that have allowed obtaining the means of exploitation.
Hence, it is inferred that the financial statements are historical in nature because they report events that occurred, however they constitute a point of reference for the user in general to project the future, they are not the only element that serves this purpose since information is required from the economic point of view, on the political and labor situation as well as other elements to carry out a reasonable evaluation, aspects that do not appear in the data reflected by the balance sheets.
Finances are developed in companies by performing the functions:
Distribution: Through the distribution function, the companies' finances ensure the capture of monetary income and the creation of accumulations and funds of monetary resources necessary to ensure the interrupted nature of the production cycle and the formation of funds for the state budget..
Control: The control function is manifested through the different mechanisms of the credit financial system through which the entire production process, merchandise and services at the company level are controlled.
The interpretation refers to the set of personal judgments related to the content of the states based on the analysis and comparison of their main objectives, these are the following:
- Diagnose the true economic and financial situation of the company Detect the weaknesses and strength of the company Adopt more accurate decisions with the least risk Provide clear, simple, accessible information to different instances.
Analysis is a professional technique that is applied only to study and evaluate the economic and financial past of the economic entity, and make decisions to achieve the proposed objective, that is, to project the future. Three types of analysis are known according to where it is carried out:
Equity or solvency analysis: The main objective of this analysis is to determine the guarantee that the company offers against its suppliers, creditors, lenders and third parties. It is also used to observe the comparison and trend composition in different investments and financing sources (it is supported mainly by the balance sheet).
Financial analysis: Studies the evolution of the profitability of investments and own resources, as well as the cost of financial resources, is in charge of the valuation of the company as a whole (the balance sheet, income statements and other statements are used on Cash Flow, state of origin and application of funds).
The economic results and the financial situation of a company are commonly reflected in two reports or statements and although with different names, they are used in companies from all over the world, balance sheet or statement of position and statement of income or statement of profit or loss.. Taken together, these documents provide an accounting overview of business operations and financial position, as well as specific data for two years or more recent along with various historical summaries of operating statistics for the past five or ten years.
Quantitative and verbal information is equally important. Financial statements report what has really happened to profits and their distribution over the past few years, while verbal statements try to explain why things turned out the way they were.
The analysis, interpretation and evaluation of the information contained in the financial statements requires being formalized with the basic tools of financial analysis.
If you want to know the financial situation of a company you start by reading the financial statements and from there you investigate what have been the causes and the effect of the company's management to get to the current situation and thus try to predict its future development, In other words, financial analysis aims to determine how to use the financial data provided by the different statements or balances to analyze the evolution or trend of the company in the (recent) past and appreciate its current financial situation, with the purpose of projecting the future.
The basic financial statements must meet the objective of reporting the financial situation of the company on a certain date. The results of its operations and the changes in its financial situation for the accounting period ended on that date. The basic financial statements are the balance sheet, income statement, variation in stockholders' equity, changes in financial position and the notes that are an integral part of them, it is a means of communicating information and not an end since it does not it is about convincing the reader of a certain point of view or the validity of a position.
The information for the financial analysis can be obtained by examining the interrelationships between the balance sheet items and income statement or simply with the individual items of each one of them.
The purpose of the financial analysis is to diagnose, what is the economic and financial situation that the company is going through at a given moment, we consider not only the interpretation of a series of reasons or induced indices, but they must go deeper into those sectors that surround the The means by which a company operates is the size of the investment, in the market, the interaction of the determining force of supply and demand, working capital, production, marketing policies, etc.
Other authors consider the analysis as «A process that includes the compilation, interpretation, comparison and study of the financial statements and operational data of a business, involves the calculation and significance of the percentages, rates, trends, indicators and complementary or auxiliary financial studies, which serve to evaluate the financial performance of the firm to help investors and creditors to take their own initiative.
It is inferred then that from this situation regarding the analysis, two situations arise that can help internalize the purpose and importance of the same:
- The scope of the most appropriate financial means depending on the stability of the company, their cost and availability in the financial market. The alternative of investment of these means, choice conditioned to profitability, balance and financial stress in Regarding liquidity and indebtedness, guarantee and money that such investment may originate.
Generally, this process begins with the calculation of financial ratios, the purpose of which is to reveal the strongest and weakest points of a company compared to the company that participates in it and demonstrate whether the company has been improving or deteriorating over time.
The analysis and correct interpretation of the financial statements represent a highly necessary instrument for executives in the contemporary world for the purposes of control and planning as well as decision making. On the other hand, this information usually shows the weaknesses and strengths that exist in the organization.
Financial statements as a starting point for analysis
To be truly efficient, the financial statements must meet the characteristics that correspond to the accounting information: Useful, significant, relevant, truthful, comparable, timely, reliability, stable (consistent) objective and verifiable, provisionality.
In order for the financial statements to be presented taking into account these characteristics, they are prepared in accordance with accounting principles and standards.
Consequently, the transactions and economic events carried out by the company are quantified and disclosed according to said particular principles and rules established for this purpose. The financial statements: (statements of financial position and income statement), form the fundamental basis of the financial analysis including others.
The financial statements provide clear, simple and accessible information to third parties interested in the financial situation of the companies.
Despite the fact that the financial statements represent a record of the company's past, its study allows defining ways to project strategies and consequent actions. It is undeniable that decision-making depends on the possibility that certain future events may occur, through a correct interpretation in the present of the accounting data.
Balance sheet, also known as statements of position, financial balance or simply balance sheet constitutes the fundamental basis in the analysis of business management, it is a model of an accounting nature that offers the global vision of the company's assets at a given moment, in the day of the date that heads it, thus the financial balance of the company on December 31 of a given year reflects its situation on that exact day, unlike the income statement, which refers to a period.
You must also report other complementary aspects that help to have a total vision of the circumstance in which you are involved and that may alter it in the future, such as statistical value or result accounts and also special order and transition accounts.
Result status. Provides a financial summary of the company's operations during a specific period. The common income statement covers the period of a given year. Usually December 31st. In addition, monthly results are prepared for the exclusive use of the administration as well as quarterly reports that must be delivered to the shareholders of publicly owned corporations.
Statement of changes in financial position. Also known as state of origin and application, it reveals the main financial management policies adapted by the company in the fiscal year. This statement is prepared by comparing the last balance with the previous one using other data. It allows knowing the new funds available to the company in the period between two consecutive balance sheets, as well as indicating where this new money came from (origin and source) and the destination it was given (application or employment), is a document that It accompanies the balance sheet, presents information on the sources and uses of the funds that were entered into the company since the previous balance sheet. It also shows the changes that have occurred in the financial resources of a company with respect to the issued capital, the net profit,dividends and working capital.
Cash flow statement: Provides information about an entity's inflows and outflows or disbursements during an accounting period. In addition, this statement aims to provide information about all the company's investment and financing activities during the period. As well as a statement of cash flows, it should help investors, creditors and other users to evaluate aspects such as:
- The company's ability to generate cash flow. The company's ability to meet its obligations and pay dividends. Reasons for explaining the difference between the value of net income and the net cash flow related to operations.
The financial statements show the summary of the operations of the registered company according to the criteria of the accountant in charge, influenced by a series of accounting principles and personal judgments of a given period
For a better study, the financial statements of the company or entity under analysis should take into account the limitations derived from the use of these. Many are the authors who have spoken about it.
When studying the financial statements it is recommended:
- Critically and systematically analyze the financial statements. Do not rely solely on accounting data. Use all possible elements. Understand accounting language and be aware of its limitations.
Financial analysis tools and techniques
Among the techniques or tools most frequently used by financial analysts are:
Comparative analysis involves confronting the data that appears in the financial statements and can be vertical and horizontal.
Static or vertical analysis method: Different procedures are used to apply these techniques:
Of integral percent: it consists of separating the content of the financial statements, in their component parts, to determine the proportion that each one keeps with the whole (%), that is, with all the parts expressed in%.
For simple reasons: They determine the dependency relationships that exist by geometrically comparing the figures of two or more concepts that make up the content of the financial statements.
Standard ratios: Determine the dependency relationships that exist by geometrically comparing the average of the figures of two or more concepts that make up the content of the financial statements.
In the vertical analysis: The items of the different states are related, achieving an analysis of their structure at the end of the same period or financial year, hence, in this type of analysis, the time factor is not substantial but provides particular analyzes for a specific objective..
In the case of the balance sheet, it is frequently carried out for each component group of assets, liabilities and capital, in which at least its elements make up more than one account, a reflected balance, as well as a total additional column, in the that one hundred percent is made up of total assets in one case and total liabilities and capital in the other.
Method of horizontal or dynamic analysis: Procedures for increases and decreases variations: consists of comparing the homogeneous concepts of the financial statements to two different dates, obtaining a positive, negative or neutral difference from the compared figure and the base figure.
This method consists of comparing the last financial year with the previous one in order to analyze the variations that have occurred in each of the account balances. Its realization is possible in the two basic financial statements.
Historical analysis or trend method: Trend procedure, which can be presented based on: series of figures or values, series of variations, series of indices. Determines the proportion of the figures for the different homogeneous lines of the financial statements.
Trend: Imaginary line of what a certain activity tends to the future
Projected or estimated analysis method. It is applied to analyze the financial statements, pro-forms or budgets through the following procedures:
Budgetary control: Prepare a program of forecasting, financial administration and operation, based on previous experiences and on the conditions expected for the future.
From the equilibrium point: It consists of predetermining an amount in which the company does not suffer loss or obtain profits.
For their development, the amounts of the balances of the accounts of more than two years are selected, and can be up to five years, if compared with each other, with the aim of getting to know how the company's stability is manifested.
More effective, common and simpler methods for analyzing financial statements
- Analysis methods of the Du Pont system: It is used to determine the return on investment (ROI) in combination with the rotation of fixed assets. Method of analysis of the break-even point: It consists of determining by means of an absorbent costing system the minimum level of operation at which it can be work in a company without generating loss in operation. By means of the equilibrium point, the costs, fixed and variable expenses, the additional profit or contribution (marginal) for each unit manufactured and sold, as well as the level of production and minimum sales required by a company to obtain a predetermined level of profits, or the minimum level of operation to avoid generating operating losses.Method by means of statement of changes in financial position, based on cash or cash flow:
It consists of determining the sources of assets (self-generating and external) as well as the applications of cash made in a given period, with the aim of knowing the generating capacity of the company's funds.
- Graphical method: It consists of converting the relevant figures from the previous analyzes to all types of applicable graphs according to the needs of representation. Method of financial ratios and proportions: It consists of making comparisons between the different figures of the financial statements, with the aim of defining o determine the credit situation of the company; their ability to pay in the short and long term; your working capital and net working capital; sales recovery periods; inventory turnover periods; capital structure etc. To make more efficient use of financial ratios, it is convenient to classify them, in this sense there are various criteria.
Basic groups of financial ratios
- Liquidity ratios: They measure the ability of the company to meet short-term obligations. Activity Ratios: It measures the degree of efficiency with which the company has used the resources made available to it. Leverage Ratios: It measures the degree with which the company has been financed with debts Profitability ratios: Measures the effectiveness of the administration through the returns generated on sales on investment Growth ratios: Measures the ability of the company to maintain its economic and industry position.Reasons for evaluation: It measures the ability of the administration to create a market value superior to the disbursements of the investment costs. These ratios express the most comprehensive measures of performance as it reflects the relationship between risk and return.Valuation is of great importance since they are related to the goal of maximizing the value of the company and the wealth of the owners.
The reasons taking into account what has been stated by other authors are classified according to another criterion. However, the practical usefulness of it will not depend on the way to classify them, but on the scope, objectives and users of the results of their calculation.
It is important to state that the analysis of the financial statements must be carried out on the basis of updated or restated financial statements, using the same techniques and methods applied to those of previous years, using as a basis for comparison.
Financial analysis is essential through financial reasons, which are the relationship of one figure to another, within or between the financial statements of a company, which allow weighing and evaluating the results of the entity's operations.
Regarding the use of ratios in the analysis according to JF Weston, great care must be taken when comparing ratios whose structural - evaluative content, that is, homogeneous, and above all, not drawing hasty conclusions about capital, "rules" pre-established with the "minimum" value and You must achieve one or more reasons.
In summary
The financial ratios, ratios or ratios are nothing more than the results of comparing two or more balances of certain balance sheet and / or financial statement accounts
Bibliography
- J. M. Fernández Pirla. Economy and Business Management.Areas Madrazo Maricela. Monograph. Analysis and Interpretation of Financial Statements. Financial Analysis for Decision Making. Benjamín González. The Bases of Business Finance.CP Haime Leny her book: Financial Planning for Modern Business.Weston John Freed, “Fundamentals of Financial Management”, Tenth Edition Volume III and IV.CP Haime Leny: Financial Planning for Modern Business.
