The financial analysis of a company can be understood as the diagnosis of the financial health of a company, which provides detailed information on the company's financial performance during a given period. This financial analysis can be separated into two stages: First, there is the evaluation of the financial situation (situational stage) and, secondly, the evaluation of the financial planning (project stage).
How important is this type of analysis?
The importance is that this type of analysis allows the entrepreneur to make decisions related to investments, loans and related issues that have to do with the improvement of the company. For example, the investor will seek to make investment decisions according to the circumstances of the market, the maturity of the company and its available resources. The same happens with companies that seek fund. In order to make such decision it will be necessary for the company to have indicators that show the current and historical situation of the company. Thus, the decision making of an entrepreneur will depend on the financial health status of the company and its potential creditors and partners.
The vast majority of small and medium enterprises do not have a report or periodic financial report of the company, as do have large companies and corporations to maximize available resources and reduce costs. That is why the decisions taken by small and medium-sized companies tend to have a greater degree of risk and uncertainty; they do not have an evaluation of the company's historical and future performance.
What indicators does a financial situation analysis take into account?
The main indicators are focused on solvency, profitability, liquidity and management analysis; in addition, it is usually accompanied by the Dupont analysis.
Each of the indicators analyzed have a set of ratios that allow detailing the periodic behavior of the financial statement accounts.
The solvency ratios analyze the short and long term payment capacity of the company, taking into account ratios related to all types of debt and leverage. The profitability analysis considers a set of ratios related to the margins or profits of the company. The liquidity allows explaining the capacity of a company to meet its short-term debts. Finally, there is the analysis related to the operation and management, this analysis details a set of ratios related to the rotation of inventories, accounts receivable and accounts payable. It should be noted that the number of ratios used varies according to the sector to which the company belongs.
Financial planning integrates the plans and strategies found in the business plan of an organization (small, medium or large).
Importance of financial planning
All those decisions made in the development of the business plan must be incorporated into the financial plan. Each of them will have an impact on the financial statements of the company: whether it is to introduce a new product, or to expand the company to other markets, or acquire a new production plant, or hire additional staff, or invest in more advertising, among others.
Consequently, the importance of the financial plan becomes quite evident in the extent that it allows:
Based on the information obtained through the financial plan, the shareholders or partners of the business will be able to know the profitability of their investment and the payback period of their investment.
It should be noted that the financial plan of a company ongoing is different from the financial plan of a company that is about to start. The first begins with an analysis of the financial situation of the company, that is, on the basis of what has already been done; while the second begins with the identification of the data, the assumptions and policies that will guide the economic and financial projections of the new venture.
In either case, the financial plan is a fundamental tool to achieve a smooth running of a company.
The sources that have been considered for the present article are the following: