Table of Contents
The financial analysis seeks to obtain some measures and relationships that facilitate decision making certain tools and techniques for several purposes, among which we can mention the following:
- Get a preliminary idea about the existence and availability of resources to invest them in a given project.
- It helps us to get an idea of the financial situation future, as well as the general conditions of the company and its results. We can use it as a tool to measure the performance of the administration or diagnose some problems existing in the company.
It must be said that to evaluate the performance of the business administration, there is nothing better than the profit analysis, which can be increased through proper management of resources that a company has, and this can only be measured by financial analysis.
One of the main tools of any company to assess its current situation is the financial analysis. It is a fundamental element to analyze the accounting information to make a diagnosis of your current situation and thus project your evolution future.
But what is it and how should a company do it so that it has real utility?
What is financial analysis?
Financial analysis is a set of techniques and procedures that allow analyzing the financial statements from a company to know your economic reality and how it is expected to evolve in the future.
It allows the accounting of the company to be really useful when making decisions since through this analysis various data and reports are extracted which are relevant to the entrepreneurs and all the agents involved.
This is achieved using a series of financial ratios, indicators and other techniques that allow obtaining detailed information on the financial situation of the company.
Objectives of the financial analysis (internal and external)
The main objective of the financial analysis is to obtain a series of data on the situation of the company that serves as relevant information both internally and externally:
- To external level to provide the information that investors, creditors, suppliers, customers and, of course, public administrations need. In this way, all external agents will be able to know the current situation of the company.
- To internal level so that both middle managers and managers can make decisions to correct the course of the company, consider new investments or know if they can access new financing.
How to do the financial analysis of a company
Even if companies prepare their own financial reports based on a broad set of indicators, The truth is that small and medium enterprises do not need so much information. Therefore, before considering how to start, you should know why type of company is carried out and what is your real need. Then, you can get to work.
In general, most companies need to know the following indicators:
Liquidity ratios
They serve to know what is the real capacity of the company to attend to your short-term financial needs. For example, the working capital is used to know if our company is able to meet short-term debts with the current treasury.
In the event that the current liabilities are greater than the current assets, the company will be at risk of being suspended from payments. In these cases, companies usually request creditors contests To access debt refinancing that increases the term of the debts and allow a break to the finances.
Solvency ratios
Measure the the company’s ability to meet all its debts regardless of the term. In general, it is measured as the difference between the asset and the liability, a capital status that is also known as equity.
If the net worth is negative, that is, if the liability due is greater than the value of the asset, the company will be bankrupt. In these circumstances, the company will be bound to close.
Business profitability
There are several indicators to determine the profitability of the company, but the most common is ROE, that is, profitability on own resources. This ratio comes to tell us how the company’s own resources have served to generate profits, and it is the measure most valued by investors.
Cash flows
The cash flow measures the ability of the company to generate treasury. If the charges are higher than the payments in a given period, the cash flow will be positive. Otherwise, it will be negative, and if the treasury control is not correct, we may not have liquidity to meet our payment commitments.