Gold Magazine November - December 2013, Issue 32 | Page 82

financial analysis

TIME FOR A

REALITY CHECK

{MONEY}

FINANCIAL ANALYSIS HAS NEVER BEEN MORE IMPORTANT
By Tasos Aristidou

T

here is no doubt that the deep economic crisis has made life difficult for every business.
Consumers are less willing to spend and banks
have limited the available cash flows in the
economy. Therefore, in such troubled times,
financial analysis is more important than ever.
Financial analysis is the process of evaluating
a company. It usually includes an analysis of
an entity’s solvency, liquidity and profitability.
There is a common false presumption that
financial analysis is unnecessary since a company’s financial statements are enough to enable
someone to judge its performance. However,
financial analysis provides much more than the
standard information found in the financial
statements.
This is because the core of financial analysis
is not to present the company’s performance
and position based on international standards
(IFRSs & ISAs) and the statutory regulations.
Indeed, when preparing financial statements,
international standards – although very important in order to avoid cases of fraud or misrepresentation – can actually create obstacles
to a true understanding of the reality of a
company. Moreover, the information included
therein is often very generic. In contrast, the
main focus of financial analysis is to compare
current performance with past performance,
budgets and comparable competitors in the
industry. A financial analyst will go behind the
numbers shown in the financial statements
and understand their nature, their effect and,
most importantly, see whether they are simply
fireworks.

A BUSINESS IS ONLY AS
STRONG AS ITS CASH FLOW
COST CONTROL

A manager needs to know exactly what the
company’s expenses are and whether they are
necessary or not. Using financial analysis you
can:
• break down all of the company’s expenses
• trace unnecessary increases in overheads and
• track down expenses that the company can
reduce without affecting its sales level.

renders the use of financial analysis a necessity
and it should not be viewed as a costly and
unnecessary service. It will give you a glimpse
of the company’s position, it will pop out the
positives but above all, it will expose the bad
habits that could make the company go bust.
This is what makes financial analysis a key for
every company’s survival.

BOOK
REVIEW

INCREASED SALES =
INCREASED PROFITS?

When a business experiences a sales increase,
managers tend to erroneously believe that
the company is doing better. However in
many cases, a company’s profit levels may not
increase during periods of sales growth. This
may be because the company is buying its
products at high prices or because it does not
control its administrative overheads. Financial
analysis allows you to understand the extent of
the company’s ability to turn sales into profits
and, through a detailed overheads review, to
understand the reasons why your company
may not be able to achieve this.

CASH IS KING!

A business is only as strong as its cash flow. In
today’s economy where the banks are reluctant
– or even unable – to lend money, a business
cannot survive for long without being solvent.
Financial analysis gives you a clear picture of
the firm’s cash flow position and its ability
to make money. More specifically, through
financial analysis you can:
• know the company’s average collection
period
• analyse the company’s ability to meet its
short-term obligations and
• track down potential liquidity shortage periods.
Financial analysis is not a simple task but
when used correctly, it provides you with valuable feedback. Today’s economic environment

AUSTERITY: THE HISTORY
OF A DANGEROUS IDEA
BY MARK BLYTH (OUP USA, 2013)
RRP: £14.99 (£10.87 FROM AMAZON.CO.UK)

B

lyth has written an engaging,
powerful economic history of
economies that have applied
austerity in the past, including
the US, UK, Sweden, Germany, Japan
and France in the 1920s and 1930s,
Denmark and Ireland in the 1980s, and
the Baltic states in 2008, demonstrating
in each case that austerity did not work.
It did not generate growth or reduce debt
in any of these cases. He shows that the
current crises in Greece, Spain, Ireland,
Portugal and Italy are not due to profligate
government expenditure but to more
differentiated specific factors, including
bailouts, recapitalizing, and adding
liquidity to the countries’ broken banking
systems. He makes the point that other
economies cannot follow the German
example of high savings and high exports,
as the UK and EU seem to expect, since
the whole world cannot be a net exporter.
It’s impossible to read this book and still
believe that austerity is the right policy for
dealing with the present eurozone crisis.
Will Cyprus prove to be the exception to
the rule?

info: Tasos Aristidou is an assistant manager at Horwath DSP (member of Crowe Horwath International).
82 Gold THE INTERNATIONAL INVESTMENT, FINANCE & PROFESSIONAL SERVICES MAGAZINE OF CYPRUS

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