Professional Documents
Culture Documents
Introduction to the
analysis of financial statements
Mara Jos Garca Lpez
Contents
% of total
Fraud
Negligence
Incompetence
85
Other
Total
100
Figure 1.3
Cost problems
Small margins due to high costs
Costs of distribution, advertisement or excessive promotion
Inadequate control over costs of production
High fixed costs
Losses or small profits
Business units with a history of losses
Organizational problems
Insufficient control over new activities
Inefficient decentralization
Problems in information systems
Inadequate cost and management accounting systems
Inaccurate or slow accounting systems
Financial problems
Insufficient capital provision
High leverage (gearing)
Excess short-term debt
Over-trading
Delay in paying suppliers
Excess investment in current assets
Poorly managed/unproductive assets
Excess dividends to shareholders
Commercial problems
Insufficient sales to cover costs.
Unsuccessful product diversification
Obsolete products
Repeated failure in launching new products
Low prices
Failure to compete in innovation
Lack of awareness of market change
Organisational
Financial
Marketing and commercial
Industrial and technological
Human resources
Organisational:
Strategic objectives of the business
Management style and business
culture
Planning mechanisms
Industrial
Technology
Research
Production capacity
Productivity
Quality
Manufacturing Process
Order book
Human Resources
Work environment
Motivation
Absenteeism
Industry Information
The business will often be affected by general developments in the industry
in which it operates. For this reason, it is essential to analyse the industry in
general by studying reports in the press, by trades unions, chambers of
commerce, banks and savings entities, business information providers,
national statistical offices, international institutions, magazines, the
specialist press and so on.
Legal Data
Year the business was founded
Legal framework
Proprietors (shareholders, partners)
Management structures
Involvement with institutional and other investors
Lawsuits
Credit rating and status (In Spain, there is a bad debts register the
Registro de Anotacin Impagadas [RAI] which records those businesses
with a record of failing to meet obligations)
Outstanding business tax, value added tax or social security debts.
General information
Business objectives and culture
History of the business
Directors biographical information, including some assessment of their
moral integrity and professional competence
Contractual obligations, agreements, joint ventures, and so on, with other
businesses
Media profile
1.6 Summary
This chapter demonstrates that the analysis of financial statements is of
obvious importance for any business that intends to succeed in the medium
and long term.
Financial analysis of a business is only one part of the total analysis needed
before trying to address and remedy its possible problems.
In undertaking an integral assessment of the business we should
analyse, not only the annual financial statements of the business, but also a
range of information relating to organisational, legal, commercial and
technological issues and to human resources.
The assessment needs to be done periodically as a checking procedure, with
the aim of taking timely corrective measures that will address weaknesses
and take full advantage of the businesss strengths.
There are limitations to the analysis of financial statements, and these
limitations should be taken into consideration when decision making is
based on the analysis.