Finance for Non-Financial Managers: The basics of financial analysis

Dave JoneseLearning, Finance for Non-Financial Managers0 Comments

Financial Analysis

A short guide on financial analysis for non-financial managers…

Financial Analysis

Evaluating and analysing the information contained in a company’s financial statements can give many useful insights as to the current state and future potential of the business.

A company’s reporting systems should fulfil the following criteria:

  1. Budgets must be produced covering the Balance Sheet aspects of a business, plus cash flows and items of income and expenditure. These must be realistic, and properly approved;
  2. Ratios should be used to monitor the company’s financial position;
  3. Reliable management accounts should be produced regularly;
  4. Budgets and management accounts should be compared to each other, with any variances being adequately investigated, and corrective actions being taken without delay.

In addition to the requirement to make sure that you are comparing ‘like with like’, it is also necessary to define key measures to measure and evaluate the performance of a business. Such key measures are usually expressed as ratios.

Financial Analysis

The use of such measures can be illustrated by looking at how we analyse profits. Measuring profits purely in isolation does not help us to fully analyse how successful a company is. Instead, it is better to relate profits to the amount of assets that have been invested in the company. Doing so then allows us to measure what is called the ‘return’ on those assets.

The name for this measure is Return On Capital Employed, with a value that is expressed in percentage terms.

Financial Analysis

Financial analysis can provide insights into four key business areas:

  1. Performance evaluation;
  2. Impact of business decisions;
  3. Asking the right questions;
  4. Identifying problem areas.

There are two main steps in the process of conducting financial analysis.

  • Step 1 involves extracting the relevant figures from a set of Financial Statements and then re-presenting them in a format that makes them easier to use for analysis.
  • Step 2 involves using the appropriate financial analysis techniques to assess the underlying factors influencing the figures.

To conduct financial analysis it is therefore necessary to have:

  • The right combination of techniques in your ‘toolkit’ (for example, ROCE);
  • The ability to understand the results these techniques produce;
  • An understanding of business sufficient to accurately evaluate and practically use the results that are produced.

Financial Analysis

About Brightbolts…

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Brightbolts are specialists in helping managers and organisations raise their levels of financial literacy and commercial awareness. Our suite of customisable Finance for Non-Financial Managers eLearning courses are used by leading global organisations to equip their managers with the skills, understanding and acumen needed to be financially fit and ready for the challenges of running successful businesses.

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