This article aims to bring us closer to the conceptual framework that serves as the environment for the activity of a Financial Statements Analyst, emphasizing the difference between the activities of an analyst and an accountant, as well as the importance of Financial Economic analysis as a component element in the decision-making process and the methodology to be followed to carry out an adequate economic-financial analysis, taking as a premise the use of Financial Statements that contain a true image of the Entity under analysis and that comply with the requirements of the Accounting Regulations international for its preparation.
1.1- The employer and decision-making in the economic horizon of companies
The company, according to the opinion of the specialists, was born with the market and precisely developed by the hand of commercial companies, adopting specificities according to the socioeconomic system to which it responds.
According to the dictionary of the Royal Spanish Academy, the action of undertaking and something that is undertaken is called a company.
IG Valdivia defines it as ¨the social economic unit, in which capital, work and management are coordinated to carry out a socially useful production in accordance with the demands of the common good ¨.
Many authors assume the criterion that it consists of an economic unit of basic production, where a set of elements or human, technical and financial factors are combined, located in one or more physical space units or management centers, combined and ordered as a system, according to certain types of organizational structures.
Being a socio-economic reality, the company is studied by various branches of knowledge (Economics, Law, Sociology, etc.), being able to differentiate its conceptualization, according to the frame of reference.
From an economic perspective, the company represents a properly structured and organized system that obtains, places and combines the factors of production in determined quantities for the production of goods and services to achieve the defined objectives.
For a company to function as a system, an important factor is that three management areas must exist:
- Ordinary management Financing management Extraordinary management
The scope of ordinary management refers to the fundamental activity of the company, that is to say the activity of sale, production (goods and services), the latter subject to the former, as well as the coordination of the sale with the production.
Financing management refers to the structure and composition of the liability generated by the need for ordinary management assets, taking into account how much risk the entity wants or can assume, interest rate, ability to repay the debt.
Extraordinary management is related to activities other than ordinary management or financing, which are generally temporary.
Intimately linked to the study of the company as a socio-economic reality, the entrepreneur always appears, who personalizes its performance, being the representative figure, who according to his motivations, pursues objectives that are consistent with the goals to be achieved by the company in a certain interval temporary.
Traditionally, the entrepreneur operated with the exclusive idea of obtaining greater productivity or performance, but currently with the development and internationalization of markets, with a clear predominance of the consumer over the producer, the entrepreneur must sharpen his strategy to the maximum and maximize his controls, for Their work is becoming increasingly complicated and extensive, as they have a wider sphere for their decisions, but the truth is that it is increasingly conditioned by a series of requirements, among which those of a financial nature play an important role. By not complying with them properly, many projects fail today and the very existence of the company is endangered, which is why it is necessary to have efficient information, that is, as brief as it is meaningful, which allows it to make adequate decisions.
What is a decision?
It is the set of actions adapted at a specific time as a result of the application of certain rules and policies to the particular conditions existing at that time, based on a communication process through which the decision-making data are transmitted at the time and the required form, that is, where information is converted into action.
A generalized criterion of the scholars of the subject, is that there are three kinds of decisions:
- Those that try to solve problems already raised. Those that are initiators of an activity. Those that try to anticipate future problems, anticipating them to prevent them.
However, the final objective of any of them will be to obtain advantages for the company or avoid difficulties and / or negative effects.
There are many questions to answer in the decision-making process: What are the advantages to be achieved? What are the drawbacks to be avoided? Will the expected results be achieved with the proposed actions? What conditions must be met for the decision to be successful? What is the probability of meeting those conditions?
Many techniques or methods have been proposed to answer these questions, but the obvious thing is that, always to answer the previous questions or when making any business decision, the following financial conditions will be taken into account:
- If the company will have the necessary funds at the appropriate times, for this an analysis and interpretation of the Financial Statements will be carried out applying different analysis techniques. If the advantages of carrying out the project are unmistakably defined and with exceptions, adequately valued, To fulfill this requirement, specific analysis indicators are applied, such as capital-budgeting, product-planning, asset replacement analysis, etc. If the company is sufficiently aware of and has assessed the risks and uncertainties involved in the decision and the accept, in this case definitive techniques to measure risk and uncertainty have not yet been achieved, although indicators such as the Beta coefficient, the Hertz method, etc. are applied.
It is evident then, that entrepreneurs need to know these analysis techniques that facilitate the discussion of the analysis report presented by the specialized areas before the Board of Directors or Board of Directors, where it is ratified that the strategic decisions in the short and medium term, they meet the aforementioned essential financial requirements.
1.2- The accountant, the analyst and the analysis.
The knowledge of the economic facts supplied by the Accounting Records, have no value by itself. Its importance depends on the use for which it is intended, that is, on its analysis and interpretation for decision-making.
The accountant is responsible for ensuring that the data provided for analysis and interpretation for decision-making purposes is based on accurate and well-collected figures.
In the text Stateless as apped in business, it is stated “It is of particular importance that the personnel in charge of accounting are familiar with the methods and requirements of statistics, when accounting records are organized, with the purpose of providing the statistical service what is expected of them "
In other words, the accountant is responsible for guaranteeing that each economic fact, day after day, has a numerical reflection that will lead to the preparation of the fundamental Financial Statements, which represent the most generic and essential of the result and the financial economic situation. of the company, so the accountant must define specific documents and controls that focus the information or points of interest in the management of the business.
It is also the responsibility of the accounting and financial specialists to prepare Budgeted Financial Statements for the analysis of future financial problems. That is why the need for well-prepared specialists who are capable of applying interdisciplinarity
The quality of the Financial Statements and other records will depend on the quality of the analysis made of them.
We cannot confuse the work of the accountant with that of the analyst, the former translates economic facts into accounting language, records and compiles them. The analyst goes the opposite way, faces some data and interprets which were the operations that gave rise to them, judging the financial economic position of an entity, the risk and / or uncertainty as well as the chances of success of making a decision.
The analyst does not carry out his work arbitrarily, he makes a planning of the work to be carried out, with its corresponding work program, people who intervene with their corresponding functions, sets the objective of the analysis that can be total or partial, as well as the estimated time necessary to carry it out.
In addition, if the entity is not known, it will collect through a preliminary investigation prior to the analysis, data such as: background on the development of the company, description of the activity, it is assisted by operational indicators to appreciate the relations of the company with entities credit, suppliers, competitive capacity, market situation among others.
1.3- Concept of Financial Economic Analysis
Accounting, as mentioned in the previous section, is a science of human knowledge that allows the methodical and systematized registration of economic operations carried out by a company and the presentation of general information on those activities through the States. Financial In order to be able to judge the financial position of said entity, one has to resort to the analysis of said statements and subsequently interpret the results of that analysis.
What is understood then by analysis?
It is the distinction and separation of a whole, until you get to know its origins, principles or elements that make it up.
However, when referring to the analysis of Financial Statements, scholars do not agree to name it, financial analysis, financial economic analysis, accounting analysis, technical economic analysis. It is the authors' criterion to assume the term financial economic analysis when it comes to the analysis of the Financial Statements and the complementary information to them, the term technical economic analysis will refer to the analysis of the different organizational areas of the company (purchase, sales, market, human resources).
Regarding financial economic analysis, multiple definitions have been given:
According to Galvez Azcaíno, it is defined as “the disintegration or separation of values that appear in the Financial Statements, in order to know their origins, the changes suffered and their causes, in order to have a more precise and truthful idea about the situation financial of a company "
The well-known specialist Oriol Amat specifies that "it is a set of techniques used to diagnose the situation and perspective of the company in order to be able to make appropriate decisions"
According to Lidia Esther Rodríguez ¨ is the disintegration of the values that appear in the Financial Statements, with the purpose of knowing their origins, the changes suffered and their causes, in order to have a more precise and truthful idea about the financial situation of the business. It is the method by which the particular knowledge of each year of the elements that make up said statements is obtained in order to be able to study their behavior within the financial structure of a company "
José Luis Urquijo treats it as "an information processing system aimed at providing knowledge about the reality of the company and predicting its probable future"
It is the authors' criterion to define the financial economic analysis as the system of techniques to be applied to the Financial Statements with the help of complementary information, which allow to measure the financial health of the Company, its capacity to generate resources, predict future advantages and risks, for decision-making purposes.
1.3.1- Difference between financial economic analysis and interpretation.
Some accountants do not make any distinction between the analysis and the interpretation of accounting information, an analyst must first consider the information that appears to be contained in the Financial Statements and then proceed with its interpretation.
The analysis of the Financial Statements is an arduous work that consists of carrying out an organization and grouping of the numerical material, including the elaboration of combinations of figures, determination of percentages, elaboration of tables, etc., these procedures are called formal analysis that constitutes the preparation of the so-called real analysis or interpretation which is a mental activity, which uses the accounting data, previously organized in the formal analysis, to discover and reveal economic facts of the past and future, the strengths and weaknesses of the Company. The interpretation of the Financial Statements is highly influenced by the experience, professional judgment and character of the analyst.
The formal analysis will be carried out by the specialized area (accounting, economics) where the accounting activity is subordinate, with the participation of the rest of the specialized areas of the company. While the real analysis or interpretation will be enriched with the participation of all organizational areas, taking into account group problem solving techniques, which would highlight qualitative and quantitative aspects that affect the situation of the entity.
The decision-making derived from the formal and real analysis, allows to reveal through a correct interpretation of the data that the accounting offers and of the factors of a social nature that are not always capable of being expressed numerically and therefore quantitatively measuring the occurrence of certain future events.
1.3.2- Background of the analysis of the Financial Statements
When credit makes its appearance (from the Latin Creditum- Crédere: believe, have confidence, delivery of a value in the present in exchange for a promise of repayment in the future) and extending this to the business of industry and commerce brings as consequently a significant increase in commercial activity. At this stage the Financial Statements are not yet used as a means of credit, they were formulated solely for the information of the owners.
In 1890, a presentation was presented to the American Bankers Association, so that the presentation of the applicant's Financial Statements was approved as an indispensable requirement for granting credits greater than a certain amount.
But it was not until the middle of the 20th century that the analysis of Financial Statements was established as an orderly process of knowledge, as a consequence of the generalization of situations, in which people and institutions had to decide on companies not directly controlled (Before finalizing the 19th century the banks calculated the solvency of the client).
Among the facts causing this generalized situation, we can mention:
- The separation of ownership and management of businesses. Development of the capital market and financial institutions (banks, insurance companies and investment funds) that have to develop a permanent task of deciding investments in foreign companies. growth in the size of companies and the spread of the holding as an organizational structure. The globalization of the money and capital markets.
Analysis of Financial Statements develops rapidly, as professional accountants assume an important place in the business world.
1.3.3- Importance and need for the analysis of the Financial Statements
The analysis and interpretation of the Financial Statements is useful in achieving several objectives:
- The evaluation of past performance The evaluation of the current condition The prediction of future potential Make the right decisions to optimize profits and resources
Being basically historical in nature, Financial Statements are more suitable for the first two purposes. However, most readers of Financial Statements are interested in the future, that is, in the Company's ability to grow and prosper and the company's readiness to adapt to varying conditions. Properly used, the analysis of the Financial Statements can provide a basis for the projection of the future and indications about the way in which the company will respond to these future situations.
From an internal perspective of the Company, the analysis of the Financial Statements offers a great number of advantages to the administration:
- In short-term and long-term planning, when selecting the objectives, policies, procedures and programs from among various alternatives In the organization, when coordinating the actions of the people who work in an entity in order to efficiently take advantage of the material, technical and human elements, allowing them to detect possible deficiencies in the operations of the different areas of a business In integration, when trying to obtain and articulate the elements, the human and material elements that planning and organization indicate as necessary for the proper functioning of the entity In the management, by guaranteeing the obtaining of the results or objectives through the authority of the administrator exercised directly or delegating in other elements, when ordering,guide and supervise their subordinates, providing firm bases to direct efforts towards the entity's purposes. In control, by measuring and comparing the results obtained with those expected, that is, if there is a balance between planning and execution.
From an external perspective, it makes it possible to publicize the situation and possible evolution of the entity to all external users: credit institutions, shareholders, suppliers, workers, clients, auditors, analysts, government agencies, competitors, investors, etc.
Through the analysis of the Financial Statements, we can answer key questions in the operation of the entity:
- What is the entity's ability to pay in the short and long term? Is the investment in inventories excessive? What working capital is available and how is it invested? Are fixed assets being underutilized? What is obtained is balanced with the investment made? Are the profits invested adequately? In which areas does the company show success or failure?
1.3.4- The Financial Statements as a source of information for the Financial Economic Analysis
The main source of information or raw material, for financial economic analysis, is constituted by the Financial Statements that are the result of a complex interaction of accounting theory and practice, with various socio-economic, political and legal influences.
In its etymological origin, the word State is derived from the Latin “status” that indicates “situation in which a person or thing is found and especially each of the successive ways of being of a person or thing subject to changes, which influence their condition. ”.
As regards the word Finance, it comes from the Latin “finis” which means “the term or fulfillment of an obligation to give money”.
According to Name “The Basic Financial Statements of Accounting, are reports that are used fundamentally, to publicize the financial situation or position of a company at a certain moment in its life, as well as the result of its economic activity during an accounting period. dice"
Before turning to analysis techniques, which will be covered in the next chapter, analysts must combine the nature and quality of their raw material. The depth of analysis possible, the reliability and the meaning of the results are directly related to the accuracy and soundness of the Financial Statements themselves. The limitations of the Financial Statements can put the analysis on another plane, some of them are inherent to the nature of financial accounting, some of them are mentioned below:
- The currency, which is the unit of value used in accounting and consequently reflected in the Financial Statements, lacks stability, therefore its purchasing power is continuously varying, so it can be said that the figures in the financial statements do not represent Absolutely real values The capacity of the administration and the efficiency of its decisions are not reflected in the Financial Statements with an assigned value, so this cannot be measured by observing said statements. Financial Statements, have inherently firmer values in the market and consequently higher realization, than in the values assigned in accounting. Accounting conventions have been included,Judgments and personal criteria that have been combined in the presentation of the financial figures of the statements. In the Financial Statements the affordability and convenience of some established policies cannot be appreciated. They do not always express the enforceability or convertibility of some assets and liabilities. Accounting there are tax provisions, which are accepted measures, but not correct bases of valuation. The Financial Statements do not accurately show the possibilities of development or survival of the business.which are accepted measures, but not correct bases of valuation. The Financial Statements do not accurately show the possibilities of development or survival of the business.which are accepted measures, but not correct bases of valuation. The Financial Statements do not accurately show the possibilities of development or survival of the business.
The limitations of the Financial Statements are not the only barriers to the Financial Economic Analysis, it can also be a misunderstood accounting policy or an inadequate informative note. One way to avoid these other limitations is compliance with the preliminary investigation carried out by the analyst or specialized area, prior to carrying out the analysis of certain steps:
1) Set properly the objective of the analysis. The extent of the analysis will depend on its purposes. The analysis can be total or partial, depending on whether you understand the situation of the company in its entirety or if it refers to certain aspects, such as its administration. Of course, a full analysis will always be recommended, since a partial analysis can sometimes lead to wrong conclusions.
2) Collect the following information about the company:
- Background on the development of the company Description of its activity Investigate whether there have been changes in its structure, activity or administration. Appreciation of the company's relationships with banking institutions, suppliers, etc. Appreciation of the company's competitive capacity Appreciation of the market at the time the analysis is carried out (if there has been an increase in prices of both what is bought and what is sold) Investigate if there have been changes in the sales policy, if they are kept in open accounts or through commercial documents. Investigate whether promotional sales, gift giving, etc. have been made due to competitive pressure.
3) Reading of the auditors' report that guarantees greater accuracy of the information and consequently a more adequate and correct interpretation of it will be obtained.
4) Verification of the accounting standards applied, which allows a general knowledge of their general effects on the Financial Statements, to achieve a solid interpretation and meaningful comparisons.
5) Review of the notes of the Financial Statements and other complementary information that certify the accounting policies and procedures followed, the explanations of extraordinary items, relevant events that occurred after the balance sheet date.
In this way, the analyst must interpret the Financial Statements in light of the existing conditions, which differ significantly from those reflected in the Financial Statements, allowing him to evaluate their impact on the environment in which the company operates and perhaps make adjustments to the Financial Statements, to achieve more meaningful relationships and comparisons.
1.3.4.1- Preparation of Financial Statements for analysis
Once the information mentioned in the previous section has been obtained, the analyst will submit the Financial Statements that have been provided to a series of modifications or adjustments necessary for their subsequent analysis and interpretation. Some of these modifications are general, so it can be said that they are rules applicable to all Financial Statements, others are specific to one of them.
General rules:
Since the analysis is not intended to offer results of mathematical accuracy or approximations to the penny, it is convenient to eliminate from the figures shown in the financial statements, the cents or, depending on the magnitude of the values, work with hundreds and thousands of pesos. It is understood that when selecting the base, this is applied to all the values presented by the Balance, following the rule that if the figure is greater than five, it is raised to the next higher unit and if it is less to the next lower one.
If there are amounts that coincide with five, the measure is usually taken of leaving them as they are, in order to affect them either more or less, depending on the difference that could exist when adding the values of Assets and Liabilities AND Capital, or bring the difference to a reconciliation account for the analysis.
Some accounts that have the same nature are grouped under the same title, of course, provided that there is no special reason to keep the detail and that it will be a reason for analysis. For example, the accounts of raw materials and materials, parts and pieces, supplies and tools, etc.
Accounts are presented at their net value, for example, those of fixed assets reduced by accumulated depreciation, accounts receivable deducting the provision for doubtful accounts, etc.
Regarding this series of general rules, it must be emphasized that the type of company will have to give guidelines to consider others that have not been mentioned.
1.3.5- Financial economic analysis and its link with International Accounting Standards
International Accounting Standards were and are currently the product of different educational, financial and professional entities in the accounting area worldwide to standardize financial information in Financial Statements, long and laborious has been the way of implementing the Standards Accounting Internationals, as a process of constant improvement
The change from Objectivity to relevance in IAS-IFRS, from the capital maintenance model to the evaluation of financial performance is evidenced.
Paraphrasing Oriol Amat, we can say "it is time to develop a common passport", for Accounting and Financial Statements in the age of global information and the IAS are not turning their back on this reality.
What is the link between IAS and the analysis of Financial Statements?
As mentioned in previous sections, the work of the analysts falls on the Financial Statements, these statements having to meet a series of parameters to be useful for the analysis. The application of the IAS in the valuation and presentation of the items of the Balance Sheet and Income Statement and other Basic statements defined by these standards, allow the analysis of the Financial Statements to be comparable at a national and international level.
The preparation of the Financial Statements by the accountants will have to take into account the provisions of the Conceptual Framework issued by the IASB and IAS 1 Presentation of Financial Statements, the fundamental aspects addressed in this regulation are: The elements that are part of said states, the requirements for their recognition, as well as their qualitative characteristics
The information regarding the accounting words and procedures that are being followed are communicated in the notes to the Financial Statements, which also include explanations of the Extraordinary Items and the main changes in accounting methods and their financial impact, financial commitments, the lease contracts, changes in the Capital and Equity accounts and the description of the contingencies.
The notes also direct attention to relevant events that have occurred after the date of the Financial Statements. The Financial Statements must be reliable at the end of the year, when they are delivered or published months later and if there have been significant changes in items, a note must accompany the Financial Statements, indicating these situations.
Thus, the reader or analyst must interpret the Financial Statements in light of the existing conditions that differ significantly from those reflected in said Statements.
This helps the analyst to review these disclosures and evaluate their impact on the environment in which the company operates and perhaps to make adjustments to the Financial Statements and achieve meaningful relationships and comparisons.
