Analysis of the Operation and Financial Condition of the Enterprise

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Analysis of the Operation and Financial Condition of the EnterpriseComparison to the industry level enables to establish the relation of the indicatorsof the analysed enterprise to the indicators of another enterprise operating in the sameindustry. For example, return on equity in other enterprises of the same industry is 25% onaverage therefore the level of this indicator (in the analysed enterprise) of 6% isconsiderably lower than in the industry on average. The industry level ratios can be used toevaluate their dynamics.By using comparison with the industry level the following limitations need to betaken into account: Even if two enterprises are homogenous, they may be incomparable. Let us assumethat we are comparing two information technology enterprises. The main area ofoperations for one of these enterprises could be the installation of the check-outsystems for supermarkets and hypermarkets, i.e., the enterprise installs specialisedpoint-of-sale systems. The other enterprise, on its turn, is offering specialisedsupermarket accounting software. And in the result the business operations of thetwo at the first glance similar enterprises are not comparable. The large enterprises often operate in several industries, i.e., they formconglomerates. In some separate industries the indicators usually differ, i.e., theyhave different returns, level of risk etc. indicators. In such cases the financialstatements of enterprises are not mutually comparable. Figures of enterprise financial statements may be incomparable also due todifferent accounting, stock evaluation methods, fixed asset depreciation estimates,overhead apportionment etc. methods. However, it is admitted that the most securecriterion for assessment of business performance is the comparison with theindustry level. Tendency (trend) analysis – establishment of the change dynamics of in indicators.Trend analysis – comparison of every position of the statement with the previousperiods and identification of their trend. Trend is established as the basic tendencyin the dynamics of the indicator without occasional impacting factors and thepeculiarities of individual periods. With the help of trend the meaningfulness of theindicators in the future is created, respectively, the forecast analysis is performed. Factor analysis – shows the influence of individual factors on the operations of theenterprise. The individual enterprise performance measures are interrelated andaffect each other. Economic indicators are most often expressed as a mathematicalcorrelation of certain factors (differences, sums, multiplication, and division).Dependent on the degree of the factors they are subdivided in the main and lesssignificant factors. The main factors should be given more attention in analysis.Therefore the analysis of factors is the analysis of the impact of certain factors(causes) on the total resulting indicator, when performing this analysis with the helpof the preset or statistic technique. Comparative analysis – comparing the performance of two enterprises or theperformance of two structural units of the same enterprise. Comparison can be alsobased on calculation of different economic indicators and comparative assessmentin dynamics. Comparison allows evaluating the performance results of anenterprise, to establish the actual variances from the budgeted figures, figures from46
Analysis of the Operation and Financial Condition of the Enterprisethe previous periods or the industry average results. This method allows foridentification of the causes for such variances and to discover any reserves. Balance sheet method allows comparing mutually interrelated indicators in order todetermine and to measure how they affect each other. By using this method onemust take into account that the amounts of the mutually related indicators must beequal. Graphical method is a good instrument for visual illustration of various processesand tendencies as well as for the processing of the results of analysis. Withgraphical presentation of the results of analysis the indicators can be easilydemonstrated and compared. Economic mathematical methods are often used for identification of the best optionby taking business-related decisions in specific circumstances. Standard and predicative simulation. Standard simulation models. These types ofmodels allow comparing the actual outcome of enterprise performance withprospective or expected results that are calculated in line with the budget. Standardmodels basically are used in internal financial analysis, in which standards for eachcost item are assessed as well as the actual data variances from these standards. Tosome extent analysis is based on the use of models with strictly determined factors.Predicative models These models are forecasts by character. These are used inprojection of the enterprise revenue and financial status.Test your knowledge:1) Name and describe the principles of enterprise performance analysis.2) What sources of information are used in the enterprise performance analysis?3) What are the objectives of financial analysis?4) Name the users of the enterprise performance analysis results, their input in theoperations of an enterprise and their claims from the performance results.5) Name what are the financial measures that the enterprise management, the owners,the lenders are interested in?6) Name and describe at least five quantitative and qualitative measures for attainmentof shareholders’ goals of an enterprise?7) During performance of the qualitative analysis of your enterprise prepare thequestionnaires according to example given above.8) What decisions can be taken for improvement of the situation?9) Substantiate, why the internal analysis of enterprise performance containsconfidential information?10) Name and describe the methods of enterprise performance analysis.11) What are the horizontal variances of financial indicators?12) Into what groups can the ratios used in practical financial analysis be subdivided?13) What techniques for comparing of financial results that can be used in enterpriseperformance analysis? Which of them can be most easily used by the enterpriseanalysts?47
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Analysis of the Operation and Financial Condition of the Enterprise

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