FINANCIAL PERFORMANCE VARIABLES

All the above mentioned and other conditions must be met to ensure effective organizational performance and an acceptable level of return on the shareholders' investment.

To determine whether such conditions are met, management must evaluate the company's performance on a regular basis, e.g. once every three, six, or twelve month, and analyze results in terms of three Financial Performance Variables, as illustrated below.

IMPORTANCE OF THE FINANCIAL PERFORMANCE EVALUATION

Evaluation of the company's performance in terms of Predetermined Standards provides the most significant management information and helps in the decision-making process. 

Such an evaluation entails comparison of current or most recent results achieved by the organization with corresponding financial plans. Hence, it is necessary to have a set of well-defined plans to ensure sound evaluation of the company's financial performance.

EXAMINATION OF TRENDS

Comparison of the company's current or most recent results with the corresponding results of previous years is particularly useful in identifying Trends. Examination of trends helps management to develop an "early warning system" and provides tangible signs of potential problems in various areas of company activities.

An effective evaluation of the company's performance also entails comparison of financial results attained by the organization with the corresponding results acceptable in particular industry. Such a comparison is usually accomplished by means of special ratios, known as Financial Ratios. These ratios are frequently used not only by managers, but also by investors, creditors, and various financial institutions.

PURPOSE OF CURRENT FINANCIAL ANALYSIS

The prime purpose of Current Financial Analysis is to evaluate the most recent financial condition and operating results achieved by the company. 

The central question addressed during current financial analysis is: 

"Where is the company now in terms of dollars and percentages?"

Current Financial Analysis entails a comprehensive examination of the company's latest available financial statements, as illustrated below.

EXAMINATION OF THE BALANCE SHEET

Examination of the latest Balance Sheet enables management to achieve the first objective of current financial analysis - to measure the company's most recent financial condition. 

This results in a detailed evaluation of assets, liabilities, working capital, (i.e. the difference between current assets and current liabilities), and shareholders equity.

EXAMINATION OF THE INCOME STATEMENT

Examination of the latest Income Statement helps management to achieve the second objective of current financial analysis - to measure the company's most recent operating performance. 

This leads to a comprehensive evaluation of revenues and expenses and the determination of cost of goods sold, gross margin from sales, and net income.

EXAMINATION OF THE CASH FLOW STATEMENT

Examination of the latest Statement Of Cash Flows enables management to achieve the third objective of current financial analysis - to measure the flow of incoming and outgoing funds. 

Such an examination indicates whether the company is generating a positive cash flow, i.e. incoming funds exceed outgoing funds, or, conversely, a negative cash flow as a result of its operating, investing, and financing activities. 

PURPOSE OF COMPARATIVE FINANCIAL ANALYSIS

The prime purpose of Comparative Financial Analysis is to evaluate the trends in the company’s financial condition and operating results during the last three fiscal years. 

The central question addressed during comparative financial analysis is: 

"What are the trends developed by the company in terms of dollars and percentages?"

Comparative Financial Analysis entails comprehensive examination of the company's financial statements covering three preceding fiscal periods, as illustrated below.

COMPARATIVE BALANCE SHEET

Comparative Balance Sheet entails an examination of several balance sheets and it enables management to achieve the first objective of comparative financial analysis - to interpret changes in the company's financial condition during several fiscal years.

Comparative balance sheet, or Common-Size Balance Sheet, discussed in this program, will include three fiscal periods. Examination of three balance sheets will help management in a detailed evaluation of trends of assets, liabilities, working capital, and shareholders' equity during the last three fiscal years.

COMPARATIVE INCOME STATEMENT

Comparative Income Statement entails an examination of several income statements and it enables management to achieve the second objective of  comparative financial analysis - to interpret changes in the company's financial performance and results during several fiscal years. 

Comparative income statement, discussed in this program, will include three fiscal periods. Examination of three income statements will help management in a detailed evaluation of trends of revenues, expenses, costs of goods sold, gross margins from sales, and net income during the last three fiscal years.

COMPARATIVE STATEMENT OF CASH FLOWS

Comparative Statement Of Cash Flows entails an examination of several statements of cash flow and it enables management to achieve the third objective of comparative financial analysis - to interpret changes in the company's cash flows during several fiscal years. 

Comparative statement of cash flows, discussed in this program, will include three fiscal periods. Examination of three statements of cash flow will help management in a detailed evaluation of trends of cash flows as a result of the company's operating, investing, and financing activities during the last three fiscal years.

FINANCIAL RATIO ANALYSIS

Financial Ratio illustrates the relationship between two specific values extracted from an appropriate balance sheet or income statement. 

Financial Ratio Analysis entails evaluation of the company's financial condition and operating results in terms of financial ratios and comparison of these ratios with the acceptable industry norms.  

The central question addressed during Financial Ratio Analysis is:

The main purpose of financial ratio analysis is to provide management and other parties with important information related to four essential parameters of the company's condition and performance, as illustrated below.

 COMPANY LIQUIDITY

Company Liquidity reflects is its ability to meet current obligations upon their maturity by means of converting available assets and to pay current liabilities.

Evaluation of the company's liquidity entails computation and interpretation of the following financial ratios, as illustrated below.

COMPANY SOLVENCY

Company Solvency reflects is its ability to meet all obligations and pay debts as they come due, whether such liabilities are current or long-term ones. 

Evaluation of the company's solvency entails computation and interpretation of the following financial ratios, as illustrated below.

COMPANY PROFITABILITY

Company Profitability reflects its ability to generate revenues, to produce a sizable net income, and to produce an acceptable return on investment. 

Evaluation of the company's profitability entails computation and interpretation of the following financial ratios, as illustrated below.

COMPANY ABILITY TO MANAGE ASSETS

Company's Ability To Manage Assets reflects the degree of utilization of working capital, inventory, capital, and other assets in the process of generating funds during a specific accounting period. 

Evaluation of the company's ability to manage assets entails computation and interpretation of the following financial ratios, as illustrated below.

THE INDUSTRY AVERAGES  

As a result of financial ratio analysis, management can compare the company's condition and operating performance against an appropriate set of norms in a particular industry. 

Such norms, or Industry Averages, can be obtained from various sources, as outlined below.