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Financial Picture of Business: Who Invests Money into the Company and How to Do It?

17/ 08/ 2017
  Author: The EY Business Academy The concept of business value explains that creditors give money for a limited period; claim the interest and repayment of the debt and shareholders demand growth of business value and dividends. How to increase market value? The market value of the business can be increased by: Growth of the efficiency Risk reduction PR & brand management How to assess the success of the company? Thanks to the funds of shareholders and creditors managers can purchase factors of production, organize business, which is able to increase the investment and create inflows of economic benefits that are measured by profit and funds. There are two directions of analysis and assessment: benefits and risks. Ultimately, the success of the company means the welfare of investors. Where could we find information about the company`s activity? There are three types of statements in a company: for external users, for public authorities and for internal users. The financial statements’ documents Balance statement lists all investments (assets) of the Company and sources of financing (debts and equity). It is unclear how the Company reached the current position from static document. Profit and Loss Statement discloses all revenues and expenses during the reporting period. Revenues and expenses are classified in a certain way. Revenues and costs characterize the economy of the company (not the cash flow). Cash Flow Statement discloses the sources of revenue and areas of funds’ expenditure during the reporting period. Inflows and outflows of the funds are classified by activity. The funds characterize Finance of a company. The report of an equity’s movement reflects all changes in equity during the reporting period: Issue of shares The redemption of shares Capitalization of undistributed profit (loss) in current period The dividends Notes are an integral part of the financial statements. They contain description of accounting policy of the company and the disclosure items of forms of financial statements. The most common cycle of working with information in the management process is: The preparation of financial statement for the last period Financial analysis and the understanding of status point Goal setting and the definition of limits Modeling for future activities (different scenarios). Evaluation of sensitivity of scenarios Planning and budgeting Budget control and analysis. The results of a survey of crisis managers put wrong planning on the 4th place among the most common causes of bankruptcies: The concentration on one client Fraud Inappropriate accounting Significant errors in planning! Problems with debt financing The problems with working capital management Excess administrative expenses Loss market, the fall in sales. Therefore, wholesome advice is to know the best practice of planning and budgeting in the company. It insists on both strategical (long-term) and operating planning and budgeting. The steps of information cycle could be: Preparation of financial statement for the last period. Financial analysis and the understanding of status point. The identification of the causes of adverse trends in the main indicators Development of methods for solving problems The definition of company’s place in the market An assessment of the strengths and weaknesses of competitors 3. Goal setting and the definition of limits. Development of methods for achieving the objectives (increase in prices, sales growth, changing expenses patterns, changing the terms of settlements with buyers and suppliers and etc.) The formation of the system of limits (repayment of loans, investment limits, attraction personnel limits, rental of premises limits, etc.). 4. Modelling of different future development scenarios: optimistic, pessimistic, most likely Development of company’s financial models Evaluation of the sensitivity of the different scenarios to changes in key factors: prices of goods/ services of the company, sales volume, input prices, tax rates, etc. 5.  Planning and budgeting Budget of revenues (in physical and monetary indicators) The budget of the production (in physical and monetary indicators) The budget of the procurement (resource provision of production: goods, raw materials, labour, space) Budget of administrative and General expenses Budget of working capital (inventory, Accounts receivable, accounts Payable) The capital expenditure budget Consolidation of information and drafting of “General budget” 6.  Budget control and analysis Calculation of deviations of actual data from budget and identification of the factors, which cause these variations (sales, prices, consumption, range, etc.) Assessment of performance indicators according to the companys divisions and regions of operations The decision on the revision of the budget (in accordance with the Rules and Procedures of a Company). Here are some examples of non-financial management decisions with the influence on the financial condition of the company: the company increased the volume of sales of goods/services the company increased prices on goods/services the company paid rent of production equipment for 6 months ahead the company has reduced the office expenses the company took the decision to provide customers with additional delays in payment of bills. It is crucial point for managers and executives to realize the daily management decisions impact on various items of the company’s financial statements, especially in the success or failure of something. That is why to succeed the highest performing companies create the strong system of working with information in the management process.

Author: The EY Business Academy

The concept of “business value” explains that creditors give money for a limited period; claim the interest and repayment of the debt and shareholders demand growth of business value and dividends.

How to increase market value? The market value of the business can be increased by:

  1. Growth of the efficiency
  2. Risk reduction
  3. PR & brand management

How to assess the success of the company?

Thanks to the funds of shareholders and creditors managers can purchase factors of production, organize business, which is able to increase the investment and create inflows of economic benefits that are measured by profit and funds. There are two directions of analysis and assessment: benefits and risks. Ultimately, the success of the company means the welfare of investors.

Where could we find information about the company`s activity?

There are three types of statements in a company: for external users, for public authorities and for internal users.

The financial statements’ documents

Balance statement lists all investments (assets) of the Company and sources of financing (debts and equity). It is unclear how the Company reached the current position from static document.

Profit and Loss Statement discloses all revenues and expenses during the reporting period.

Revenues and expenses are classified in a certain way. Revenues and costs characterize the “economy” of the company (not the cash flow).

Cash Flow Statement discloses the sources of revenue and areas of funds’ expenditure during the reporting period. Inflows and outflows of the funds are classified by activity. The funds characterize “Finance” of a company.

The report of an equity’s movement reflects all changes in equity during the reporting period:

  • Issue of shares
  • The redemption of shares
  • Capitalization of undistributed profit (loss) in current period
  • The dividends

Notes are an integral part of the financial statements. They contain description of accounting policy of the company and the disclosure items of forms of financial statements.

The most common cycle of working with information in the management process is:

  1. The preparation of financial statement for the last period
  2. Financial analysis and the understanding of “status point”
  3. Goal setting and the definition of “limits”
  4. Modeling for future activities (different scenarios). Evaluation of “sensitivity” of scenarios
  5. Planning and budgeting
  6. Budget control and analysis.

The results of a survey of crisis managers put wrong planning on the 4th place among the most common causes of bankruptcies:

  1. The concentration on one client
  2. Fraud
  3. Inappropriate accounting
  4. Significant errors in planning!
  5. Problems with debt financing
  6. The problems with working capital management
  7. Excess administrative expenses
  8. Loss market, the fall in sales.

Therefore, wholesome advice is to know the best practice of planning and budgeting in the company. It insists on both strategical (long-term) and operating planning and budgeting.

The steps of information cycle could be:

  1. Preparation of financial statement for the last period.
  2. Financial analysis and the understanding of “status point”.
  • The identification of the causes of adverse trends in the main indicators
  • Development of methods for solving problems
  • The definition of “company’s place” in the market
  • An assessment of the strengths and weaknesses of competitors

3. Goal setting and the definition of “limits”.

  • Development of methods for achieving the objectives (increase in prices, sales growth, changing expenses patterns, changing the terms of settlements with buyers and suppliers and etc.)
  • The formation of the system of limits (repayment of loans, investment limits, attraction personnel limits, rental of premises limits, etc.).

4. Modelling of different future development scenarios: optimistic, pessimistic, most likely

  • Development of company’s financial models
  • Evaluation of the “sensitivity” of the different scenarios to changes in key factors: prices of goods/ services of the company, sales volume, input prices, tax rates, etc.

5.  Planning and budgeting

  • Budget of revenues (in physical and monetary indicators)
  • The budget of the production (in physical and monetary indicators)
  • The budget of the procurement (resource provision of production: goods, raw materials, labour, space)
  • Budget of administrative and General expenses
  • Budget of working capital (inventory, Accounts receivable, accounts Payable)
  • The capital expenditure budget
  • Consolidation of information and drafting of “General budget”

6.  Budget control and analysis

  • Calculation of deviations of actual data from budget and identification of the factors, which cause these variations (sales, prices, consumption, range, etc.)
  • Assessment of performance indicators according to the company’s divisions and regions of operations
  • The decision on the revision of the budget (in accordance with the Rules and Procedures of a Company).

Here are some examples of non-financial management decisions with the influence on the financial condition of the company:

the company increased the volume of sales of goods/services

  • the company increased prices on goods/services
  • the company paid rent of production equipment for 6 months ahead
  • the company has reduced the office expenses
  • the company took the decision to provide customers with additional delays in payment of bills.

It is crucial point for managers and executives to realize the daily management decisions impact on various items of the company’s financial statements, especially in the success or failure of something. That is why to succeed the highest performing companies create the strong system of working with information in the management process.

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