How to Write the Budget Analysis: Managing Tips

How to Write the Budget Analysis Managing TipsFrom the formal point of view they can be considered a document that reveals the working capital and the profit for the year. They distinguish between the inner and outer financial statements. The first is analytical and evaluates the general ledger; the second is synthetic and is presented to the public, or to shareholders, banks, tax offices and more. To obtain information that can make judgments on the situation of a company is necessary to draw up the budget analysis. Let’s see how to perform it.

The analysis of the budget can be for indexes or flows. Indexes or better ratios of the financial statements represent the relationships between data derived from the calculated budget or / and from the accounting records related to the financial, economic and assets of the company. The indices have an indicative function of a direct interpretation of the financial statements and their meaning if compared over time or with calculations performed on different accounts of the same company, or in space, ie with calculations carried out, on a certain date, on budgets of companies and competitors in the same sector.

To begin the analysis of budget indices we will analyze the capital structure of the company, then evaluate both its finance and the economic situation. The equity components should be studied, both in terms of loans that the side of sources of funding, through the calculation of the ratios so-called composition. With the analysis of lending we will highlight the degree of liquidity or stiffness of the capital that is calculated, on the one hand, by relating the value of net fixed assets to total loans, and on the other, between current assets and total loans.

The examination of the composition of the sources reflects the weight of the different types of funding through the calculation of some reports, or between short-term debt, long-term debt, venture capital and the total lending. The division between equity and total lending expresses the capital strength.

The examination of the composition of the sources reflects the weight of the different types of funding through the calculation of some reports, or between short-term debt, long-term debt, venture capital and the total lending. The division between equity and total lending expresses the capital strength.

To know the real net worth, in addition to directories, you may also use the calculation of the ratio of current assets and fixed assets. The result obtained from the division points out the degree of elasticity of the company. It is important to know the percentage of degree of depreciation of investments, which is calculated by dividing between them the total of depreciation for fixed assets. The result will be multiplied by 100.

The financial analysis is concerned with examining the company’s ability to maintain balance in the receivables and payables, without damaging the economic situation. It is implemented with the coverage ratios, those of debt and those of solvency.

The coverage ratios emphasize the use of funding sources to enable business investment. Three reports are to be made, it is the index of the global coverage of fixed assets by dividing the net fixed assets of the available capital, the index of self-coverage of fixed assets derived from the ratio of fixed assets and equity, and, finally, the coverage ratio of fixed assets with liabilities consolidated by dividing their values. The amount of the first calculation should be less than one, since if more indicates that the company has an imbalance between investment and loans. The second index, if it is equal to 1 shows that real estate assets are covered by equity capital, if it is above this figure emphasizes that the company has requested external loans and therefore the assets exceed the capital company. The third index is perfect if exceeds the amount of 1, in this case means that the investments are higher than the debts. If it is lower, it signals inappropriate funding.

To complete the financial analysis is to calculate the gearing or leverage dividing the total loans by equity. If the ratio is equal to 1, the company has financed its investments with venture capital, if greater than 1 it has activated the loans, if it is around 2, it has a good balance between own capital and that of third parties. Whenever this figure is higher the company is over-indebted.

To understand the degree of solvency we must take into account liquidity ratios and rotation. With the current ratio or index of current liquidity, obtained by the division between current assets and current liabilities, you will know the capacity of the company to live up to its commitments in the short term. A ratio less than one means that the company has serious difficulties, close to 2 is in excellent liquidity conditions. With the immediate liquidity ratio or acid ratio, given by the division of the sum of the availability of funding and liquidity with current liabilities, you will know the actual immediate liquidity. With the quick ratio or quick ratio of liquidity, proceeding from liquidity ratio and debt repayment, you become aware of the ability to pay debts at the right maturity with readily available cash.

To complete the picture you will have to calculate the index of rotation in order to learn the speed of the reversal in both loans and capital. Just to compare the net proceeds of sale with total lending. The higher the figure obtained, the greater the degree of resource used in the activity. Here the analyst should determine the turnover rate of current assets, and the ratio of the total net revenues with current assets. Thanks to the result you will know the number of times that the resources were used in current assets following the sales.

With the analysis of the economic situation we understand the company’s ability to bear the costs and achieve earnings. The preparation of the budget does not allow to express the real economic situation because it refers to a period of past time, while what matters is the future predictions. Just for this you will have to compute the rate of return on capital, by dividing the amount of the profit achieved for that of the share capital, ROE (return on equity), dividing income by capital, the ROS (return on sales) or rather the gross yield sales, comparing the gross operating income with net sales revenues and ROI (return on investment), i.e. the rate of return on invested capital, obtained by the division between gross operating income and total loans.

ROE expresses the profitability of the venture capital, the ROS that of sales and ROI the percentage of return on capital invested in the company. The corporate tax charge is calculated on the incidence rate of tax gross or net, i.e. the division between the amount of taxes for the year and the gross income or net of taxes, all multiplied by 100.

The numerous management operations originate from changes in capital components. These changes are defined as cash flows. Those financial analysis studies the causes that brought on the change in net working capital. They give some more information in addition to that contained in the budget. The cash flows of liquidity are used to indicate the reasons for which they changed the liquid funds, i.e. cash, checking accounts, both bank and postal.

Cash flows entailing changes, either increase or decrease, in the circular net capital are investments and divestitures estate, loans and debt repayments, the increases and decreases in capital and operating costs and revenue management.

The cash flows that derive from operating activities are related to the components of monetary income, i.e. costs and revenues and from non-monetary assets, i.e. depreciation, provisions, capital gains, capital losses and capitalization of costs. The cash flow statement requires filling out a worksheet, a chart consisting of two comparative balance sheets, income statement and the notes. Once the document has available data, you can complete the financial statement of changes in net working capital. The first part will mark the flows determined by the management of assets, liabilities and consolidated by the equity in the second variation of liquidity, inventory and current liabilities.

The change in working capital due to operating activities is counted with the procedure for making the difference between revenues and monetary costs, or with indirect adding the profit with the monetary costs and subtracting revenues.

The financial statement of changes in liquidity expresses the cash flows, i.e. inputs and outputs in the financial statement. It must indicate the receipts and payments related to movements estate, refunds or openings of debt, capital increases for payment, repayments, payments of accounts payable, collections of accounts receivable, payments for purchases and withdrawals after sales.

Even this performance involves compiling a report similar to the above. You will have to keep in mind not to include the variations which are not concerned with the immediate liquidity. These modifications of immediate liquidity are called cash flow. This term refers to a mathematical sum of cash changes and balances of the various accounts of the company. The cash flow during the year is deemed positive if the liquidity has increased, negative if it diminished.