Financial Analyses

Financial Analyses

DOI: 10.4018/978-1-5225-3059-6.ch007

Abstract

Financial analyses provide an account of an enterprise's past performance, a picture of its current financial strength/weakness, and a glimpse into the future financial potential. The owner of a farm firm periodically assesses and analyses the performance of the enterprise against predetermined objectives. The analysis is undertaken with the use of some tools. Because the discerning farmer needs to keep objectives of the enterprise in constant view, this chapter focuses on financial analyses with a view to highlighting the tools used in assessing a farm firm performance against predetermined objectives. The discussions are based on a review of relevant literature. The objectives of this chapter include defining the concept of financial analyses, describing the tools for analyses and showing worked examples of financial analysis, and highlighting the concept of rate of return. Financial analyses can be undertaken by management of an enterprise or by parties outside the enterprise. The three commonly used tools of financial analyses, namely the balance sheet, the income statement, and the cash flow statement, tend to be associated with some flaws, especially with regard to the reliability and validity of the accompanying figures. As a result, results from financial analyses should be interpreted with caution. It is further recommended that financial analyses be matched with a more observable measure of the financial health of a farm enterprise in terms of physical growth and expansion, credit worthiness, and how the enterprise meets its maturing obligations.
Chapter Preview
Top

Background

Financial Analysis

Financial analysis, also known as financial statement analysis, involves maintaining, keeping and using records and relevant information to evaluate the financial performance of an enterprise. It is an attempt to look into the reported financial figures of a business outfit in order to determine its financial strengths and weaknesses (Anon, 2014). It is the process of identifying the financial strengths and weaknesses of the firm by properly establishing relationships between the items of a typical financial statement such as the balance sheet and the profit and loss account. A major objective of the financial analysis of farms is to judge how much farm families participating in a project will have to live on. Financial analysis can be undertaken by management of a firm or by parties outside a firm. The nature of financial analysis differs depending on the purpose of the analyst. For instance, trade creditors are interested in their claims being met by the firm over a very short period of time; their analysis will therefore be limited to the evaluation of the liquidity position. The suppliers of long-term credit, on the other hand, are interested in the firms’ profitability overtime, its ability to generate cash to enable it pay interest, return their claims and the relationship between the various sources of funds. Similarly, shareholders are most concerned about the firms’ earnings and as such concentrate their analysis on the firms’ present and future profitability. Because management has the overall responsibility to see that resources of the firm are used most efficiently and effectively, it is concerned with every aspect of the financial analysis.

Analyzing the Performance of a Farm Enterprise

The owner of a farm firm periodically assesses the performance of the enterprise against predetermined objectives. The analysis is undertaken with the use of some tools. The most widely used financial statements are the balance sheet, the income statement and the cash flow statement.

In analyzing the performance of a typical farm enterprise, some indicators are used. The performance of the enterprise enables the analysts and relevant owners of the business to know if the business is expanding, contracting or outright stagnant with respect to growth. In effect, the indicators show the weakness or strength of the performance of the performance the business.

According to Olukosi and Erhabor (1988), indicators of the performance of an enterprise include measures of financial success, capital position, and farm size and resource use efficiency. Financial success, also referred to as the profitability of the enterprise, is determined by analyzing the net farm income statements. The capital position shows the solvency or otherwise of a firm. Solvency refers to the ability of the firm to meet its obligations are fall due. Measures of capital position are based on the analysis of the net worth statement. Measures of farm size are based on physical output of the farm, number of animals kept and/or crops cultivated, area of land under cultivation, total amount invested and total number of people employed. Efficiency indicates a level of performance that describes a process that uses the lowest possible amount of inputs to produce the greatest possible amount of outputs. It is defined as the quantity of output, Y, per unit of input, X, used in a production process. Resource use efficiency is obtained by looking at the ratio of output to input in the enterprise. These measures of financial performance of enterprises are focused on under the relevant financial statements.

Complete Chapter List

Search this Book:
Reset