Tools of Financial Analysis and Planning PDF

Tools of Financial Analysis and Planning Financial Statement Definition Income statement Position statement  Financial Statements There are three main financial statements that every company creates and monitors: – the balance sheet, – income statement, and – cash flo...

Tools of Financial Analysis and Planning Financial Statement Definition Income statement Position statement  Financial Statements There are three main financial statements that every company creates and monitors: – the balance sheet, – income statement, and – cash flow statement. Companies use these financial statements to manage the operations of their business and also to provide reporting transparency to their stakeholders. All three statements are interconnected and create different views of a company’s activities and performance.  Balance Sheet The balance sheet is a report of a company's financial worth in terms of book value. It is broken into three parts to include a company’s assets, liabilities, and shareholders' equity. Short-term assets such as cash and accounts receivable can tell a lot about a company’s operational efficiency. Liabilities include its expense arrangements and the debt capital it is paying off. Shareholder’s equity includes details on equity capital investments and retained earnings from periodic net income. The balance sheet must balance with assets minus liabilities equaling shareholder’s equity. The resulting shareholder’s equity is considered a company’s book value. This value is an important performance metric that increases or decreases with the financial activities of a company.  Income Statement The income statement breaks down the revenue a company earns against the expenses involved in its business to provide a bottom line, net income profit or loss. The income statement is broken into three parts which help to analyze business efficiency at three different points. It begins with revenue and the direct costs associated with revenue to identify gross profit. It then moves to operating profit which subtracts indirect expenses such as marketing costs, general costs, and depreciation. Finally it ends with net profit which deducts interest and taxes. Basic analysis of the income statement usually involves the calculation of gross profit margin, operating profit margin, and net profit margin which each divide profit by revenue. Profit margin helps to show where company costs are low or high at different points of the operations.  Cash Flow statement The cash flow statement provides an overview of the company's cash flows from operating activities, investing activities, and financing activities. Net income is carried over to the cash flow statement where it is included as the top line item for operating activities. Like its title, investing activities include cash flows involved with firmwide investments. The financing activities section includes cash flow from both debt and equity financing. The bottom line shows how much cash a company has available. What Is Financial Statement Analysis? Financial statement analysis is the process of analyzing a company's financial statements for decision-making purposes. External stakeholders use it to understand the overall health of an organization as well as to evaluate financial performance and business value. Internal constituents use it as a monitoring tool for managing the finances. Types of Financial Statement Analysis Types of Financial Statement Analysis Techniques of financial statement analysis Comparative statement analysis Comparative Balance Sheet Analysis  Comparative balance sheet analysis As on 31st March (Rs. in thousands) Liabilities 2003 2004 Assets 2003 2004 Rs. Rs. Rs. Rs. Capital 2,845 2,845 Cash and Balance Reserve and with RBI 27,06,808 22,37,601 Surplus 39,66,009 47,65,406 Balance with Banks Deposits 4,08,45,783 4,40,42,730 and Money at call & Borrowings and short notice 11,36,781 16,07,975 Other Liabilities 7,27,671 2,84,690 Investments 2,14,21,060 2,35,37,098 Provisions 16,74,165 17,99,197 Advances 1,95,99,764 2,11,29,869 Fixed Assets 4,93,996 5,36,442 Other Assets 18,58,064 18,35,883  Increased/ Increased/ Particulars Year ending 31st March Decreased Decreased (Amount) (Percentage) 2003 2004 Rs. Rs. Rs. Rs. Assets Current Assets Cash and Balance with RBI 27,06,808 22,37,601 (+) 4,69,207 (+) 17.33 Balance with Banks and money at call and short notice 11,36,781 16,07,975 (–) 4,71,194 (–) 41.45 Total Current Assets 38,43,589 38,45,576 1987 0.052 Fixed Assets Investments 2,14,21,060 2,35,37,098 (-) 21,16,038 (-) 9.88 Advances 1,95,99,764 2,11,39,869 (-) 15,40,105 (-) 7.86 Fixed Assets 4,93,996 5,36,442 (-) 42,446 (-) 8.59 Other Assets 18,58,064 18,35,883 (+) 22,181 (+) 1.19 Total Fixed Assets 4,33,72,884 4,70,49,292 (+) 36,76,408 8.48 Total Assets 4,72,16,473 5,08,94,868 36,78,395 7.79 Current Liabilities Borrowings 7,27,671 2,84,690 (+) 4,42,981 60.88 Comparative Profit and Loss Account Analysis Trend analysis  Trend analysis Year Deposits Advances Profit 1999 2,05,59,498 97,14,728 3,50,311 2000 2,66,45,251 1,25,50,440 4,06,287 2001 3,19,80,696 1,58,83,495 5,04,020 2002 3,72,99,877 1,77,26,607 5,53,525 2003 4,08,45,783 1,95,99,764 6,37,634 2004 4,40,42,730 2,11,39,869 8,06,755  Trend analysis Deposits Advances Profits Year Amount Trend Amount Trend Amount Trend Rs. Percentage Rs. Percentage Rs. Percentage 1999 2,05,59,498 100.0 97,14,728 100.0 3,50,311 100.0 2000 2,66,45,251 129.6 1,25,50,440 129.2 4,06,287 115.9 2001 3,19,80,696 155.5 1,58,83,495 163.5 5,04,020 143.9 2002 3,72,99,877 181.4 1,77,26,607 182.5 5,53,525 150.0 2003 4,08,45,783 198.7 1,95,99,764 201.8 6,37,634 182.0 2004 4,40,42,730 214.2 2,11,39,869 217.6 8,06,755 230.3 Common size analysis Particulars 31st March 2003 31st March 2004 Amount Percentage Amount Percentage Fixed Assets Investments 2,14,21,060 45.37 2,35,37,098 46.25 Advances 1,95,99,764 41.51 2,11,39,869 41.54 Fixed Assets 4,93,996 1.05 5,36,442 1.05 Other Assets 18,58,064 3.94 18,35,883 3.61 Total Fixed Assets 4,33,72,884 91.86 4,70,49,292 94.44 Current Assets Cash and Balance with RBI 27,06,808 5.73 22,37,601 4.40 Balance with banks and money at call and short notice 11,36,781 2.41 16,07,975 3.20 Total Current Assets 38,43,589 8.14 38,45,576 7.60 Total Assets 4,72,16,473 100.00 5,08,94,868 100.00 Fixed Liabilities Capital 2,845 0.01 2,845 0.01 Reserve and Surplus 39,66,009 8.40 47,65,406 9.36 Deposits 4,08,45,783 86.50 4,40,42,730 86.54 Total Fixed Liabilities 4,48,14,637 94.91 4,88,10,981 95.91 Current Liability Borrowings 7,27,671 1.54 2,84,690 0.56 Other Liabilities Provisions 16,74,165 3.55 17,99,197 3.53 Total Current Liability 24,01,836 5.09 20,83,887 4.09 Total Liabilities 4,72,16,473 100.00 5,08,94,868 100.00 Funds flow statement Cash flow statement  Differences Funds Flow Statement Cash Flow Statement 1. Funds flow statement is the report on the 1. Cash flow statement is the report showing movement of funds or working capital sources and uses of cash. Funds flow statement explains how working 2. capital is raised and used during the 2. Cash flow statement explains the inflow and particular period out flow of cash during the particular period. 3. The main objective of fund flow statement is 3. The main objective of the cash flow to show the how the resources have been statement is to show the causes of changes Balanced, mobilized and used. in cash between two balance sheet dates. 4. Funds flow statement indicates the results of 4. Cash flow statement indicates the factors current financial management. contributing to the reduction of cash balance in spite of increase in profit and vice-versa. 5. In a funds flow statement increase or 5. In a cash flow statement only cash receipt decrease in working capital is recorded. and payments are recorded. Cash flow statement starts with opening 6. In funds flow statement there is no opening 6. cash balance and ends with closing cash and closing balances. balance. Ratio analysis Ratio analysis