How can you assess the situation of the enterprise? Only conduct an analysis of his affairs on the basis of available data. This discipline such as financial analysis. It allows you to carefully evaluate the available data and render your verdict. A tool in this process are financial analysis methods. What are they like? What goals are they suitable for?
general information
Initially, we will understand what constitutes a financial analysis of the enterprise. Methods and features should be studied only after they have found a definition of the term itself. This will avoid confusion and ambiguity.
So, financial analysis is a process of researching the state and main results of an enterprise, which aims to identify reserves and ensure effective development in the future. Its results serve as the basis for making managerial decisions, developing strategies and the adequate operation of a commercial structure. Therefore, do not underestimate the methods and techniques of financial analysis. A description of all existing problems and shortcomings allows you to quickly deal with them before they take on a threatening form and size. What can help with this?
What are the main methods of financial analysis?
There are six of them:
- Horizontal analysis. It involves a comparison of reporting positions with the previous period.
- Vertical analysis. It is used to identify the specific weight of specific articles within the framework of the final indicator, which is taken as 100%.
- Trend analysis. It involves a comparison of all reporting positions with a number of previous periods. This allows you to determine the trend, that is, the main tendency of the dynamics of indicators that is cleared of individual characteristics and random influences of individual periods. Used to form and predict possible values in the future.
- Relativity analysis of coefficients (indicators). It is a calculation of the relationships between specific reporting items. Used to determine the relationship of indicators.
- Spatial (comparative) analysis. Used to study the performance of subsidiaries or large divisions, as well as competitors or the industry average.
- Factor analysis. Designed to determine the degree of influence of individual causes on the result. May be direct or reverse. In the first case, the result is divided into component parts and studied. In the second case, the individual elements are connected until they obtain the available result.
Of course, to understand what the methods of analyzing the financial condition of the enterprise are based on a short brief description is quite problematic. Therefore, let's look at an example of their use.
What and how is it most often used in an enterprise?
Let's say we have a commercial structure that needs to be explored. What methods of financial analysis of the enterprise to choose for specific situations? Here is a short list:
- Vertical analysis. Due to its implementation mechanism, it is often also called structural. It can be carried out in the case when it is necessary to determine the structure of the final financial indicators and to determine how much they affect the final result of economic activity. For a better understanding of the situation, the amounts for individual items can be presented as a percentage. This approach allows you to successfully organize a comparison of economic potential, evaluate the results of activities in the presence of different values of the resources used and allows you to smooth out the negative impact of inflation, which distorts the absolute reporting indicators.
- Horizontal analysis. Due to its implementation mechanism, it is often also called dynamic. Based on the study of changes in individual financial indicators for a certain time period. It is usually carried out after vertical analysis. Horizontal allows you to determine by which articles and sections changes have been recorded. Important is the study of various ratios, which are based on different absolute indicators of financial activity. For this, financial statements are used. At the same time, whole groups of indicators are highlighted that provide information about certain points. What is most common? These are indicators: liquidity, profitability, solvency and financial stability, market activity, turnover (business activity). In this case, it is necessary to take into account a number of specific points. First of all, the fact that financial ratios are significantly affected by the accounting policies of the company. Secondly, the diversification of activities significantly complicates the analysis by industry, because the normative values in these cases can vary significantly. And thirdly, it must be borne in mind that the coefficients selected as a base may not be optimal and may not meet the objectives.
What else?
Perhaps, due to its popularity, some other methods of analyzing the financial activity of an enterprise deserve attention. It:
- Comparative analysis. It allows you to compare the values of individual groups, similar to the nature of indicators among themselves. What is meant in this case? As separate groups, we can distinguish the indicators of the enterprise and competitors, individual units and structural units, industry average, reporting and planning.
- Factor analysis. Due to its implementation mechanism, it is often also called integral. Used to obtain the most complete and detailed assessment of the financial condition of the enterprise.
Other methods of analysis are not so popular. Although they are used in certain cases. The only question is what are the goals. Indeed, speaking in general terms, it is necessary to obtain a certain number of key parameters that will provide accurate and objective information about the financial condition. In this regard, interest is represented by profit and loss, changes in liabilities and assets, settlements with creditors and debtors.
About objects, subjects and methods
Financial analysis is used to determine the position of economic enterprises for a certain period of time, as well as to predict the near and long term. It also allows you to comprehensively assess the state of the research object, identify the factors and causes that led to the achieved state, prepare and justify the recommended management decisions, identify and mobilize reserves for improving performance. So what are we working with? First of all, you need to talk about objects. Their role is financial reporting, which should be reliable, open, understandable, meaningful, useful, complete, consistent, comparable, prudent and neutral. Of course, it covers events that were in the past. But their data is needed for planning, as well as forecasts for the future.
By studying this information, it is possible to establish the presence of certain shortcomings in the enterprise or certain areas of its activities, as well as identify reserves for improving the process of managing commercial, financial and production operations. The subjects in this case are two groups of users that are interested in the structure. The first includes owners, management, tax authorities, lenders, customers and suppliers, who interpret it depending on their interests. The second group consists of lawyers, auditors, consultants, exchanges, trade unions, associations and the press. They protect the representatives of the first.
And what about the technique? It includes three interconnected blocks: analysis of financial results, condition and efficiency of the economic activity of the enterprise. It is possible to consider them separately, but the probability of the formation of incorrect conclusions is significantly increased.
About datasets
Methods of analysis of financial and economic activities have no price, if there is no reason to use them. Where, how and what data is received for this? Conditionally, in this case, three groups can be distinguished:
- Statistical. This includes the results of observation, relative and absolute indicators (they are coefficients), series of dynamics, calculations of average values, a summary and grouping of data by some signs, comparisons, detailing, graphical methods, and indices.
- Accounting. This is a double recording method, balance sheet and so on. Everything that the accounting service of the enterprise does.
- Economic and mathematical. This is perhaps the most difficult moment, which, however, can show excellent results. These include elementary mathematics, analysis, statistics, economic methods, programming, operations research, calculation of technical depreciation, game theory and schedules, and much more.
It just so happened that certain factors must be taken into account, because it depends on them how efficiently the available data sets will be used. What exactly is it about? These are planning methods, and various accounting methods, and reliable accounting information, the static nature of the coefficients used, as well as the diversification of the enterprise. Despite the apparent simplicity, methods of financial analysis of activities have many small points and nuances that can dramatically turn the picture and show (or hide) extremely important information. Therefore, specialists need to be very careful. After all, although there are not many of them, the information prepared by them affects the management decisions that are displayed on the future of the entire enterprise.
About research and study
The methods and analysis of the financial condition of the enterprise are significantly affected by the content and characteristics of goals, objects, tasks and requirements. It is a comprehensive and systematic study, which is based on an objective assessment. At the same time, it is necessary to constantly look for ways to increase efficiency by mobilizing reserves. It is also necessary to use to the maximum all available financial resources and make optimal decisions on their management. After all, there is no point in creating and forming a system of indicators that allows us to characterize the activities of a commercial structure, if no one is interested in this from the top management. Correctly selected methods of analyzing financial results will allow you to make optimal decisions and stay on the market or even expand your business. Of course, basically it all depends on the positions accepted by the management, but well-studied and researched data, with the given arguments, can make it possible to correct (if necessary) their behavior and protect them from possible errors. It should be understood that financial analysts and other similar specialists act precisely as advisers.
In general, there are a large number of factors that can be problematic to describe using formulas, and they must be taken into account by senior management. For example, it can be personal relationships between directors of different enterprises, agreements with government officials, etc. It’s impossible not to take this into account. Then, how to display them in the form of formulas and calculations is quite problematic. But this is not necessary (though, only to auxiliary services). After all, the main goal is to study large amounts of data in order to prepare the basis for making correct and adequate decisions.
About informal methods
Until now, the main attention has been paid to tough analytical relationships and dependencies, mathematical apparatus and accurate calculation. It should be noted that this is not all the available tools. There are still informal methods for analyzing financial indicators. An example is the construction of indicator systems (psychological, morphological, comparative) or analytical tables, expert scenarios and assessments. As you can see, they do not focus on numbers and accuracy of calculation, but on the “human factor”. Of course, this does not mean that mathematics can be safely discarded and not used. These methods have rather limited application possibilities. Take, for example, the peer review method. If you provide them with brief information about the situation of the enterprise, it will be difficult to achieve approximately the same conclusions on their part. And this leads to high risks in making decisions that decide his fate.
At the same time, their recommendations can be useful in developing a specific product, when it is necessary to find out whether a particular product will be useful and in demand on the market. But, alas, even experts are wrong. Informal methods of financial and economic analysis carry significant risks, and the data obtained with their help are used to a greater extent as advisory. This must always be considered.
You can consider another example. Here are the polls conducted to find out if people are middle class. As practice has shown, many believe that they belong to this group of society. Although in fact, if you use the indicators proposed by international financial institutions, then in the percentage display there is a difference that amounts to several times! So using them as a hard base is not recommended.
About modeling
Methods of analysis of financial statements involve the use of significant tools to obtain the highest quality data. One of them is building models. They allow you to identify and structure the relationships between the main indicators. There are three main types:
- Descriptive models. They are descriptive. Mainly used to assess the financial condition of a commercial structure. These include the system of reporting balances, the creation of analytical sections, the study of relative indicators and several others. All of them are based on accounting data.
- Predicate models. They have a prognostic character. They are used to find out what level of income and expenses you can count on. Assess the financial condition. As the most famous, we can recall the calculation of the critical sales volume point and the situation analysis model. They require quite complex calculations.
- Regulatory models. Allow you to compare the actual results with the planned. They are used for internal financial analysis in order to identify deviations in work or to search for erroneous assumptions in previously made conclusions.
Models must be widely used, because they allow you to predict the result and avoid possible errors.
Conclusion
So the methods of analysis of financial stability, efficiency and legal capacity of the enterprise were considered. Of course, this topic is too extensive to fit into the framework of one article. It would be worth mentioning and considering the mathematical formulas used in certain cases, the process of constructing mathematical models, and much more, which makes it possible to understand financial analysis in more detail. But this does not require the size of the article, but an entire book. Which, alas, is not possible. Although to familiarize the information provided is enough.
And then everyone independently makes decisions about which way he needs to move and what to study further. You can concentrate on the models. In this case, economic cybernetics is suitable , since it is this science that specializes in them. If there is a need to understand the basic formulas, then this should be entrusted to econometrics. Of course, to master all this from a snap will be problematic, but, as they say, perseverance and labor will grind everything. You should not give up and give up, you need to act and work, then everything will be.