To do accounting analysis of company is not so easy. It is complicated because for doing accounting analysis, you need super brain for knowing what is in veil of given accounting data. Because my whole life is devoted to know the deepness of accounting, so today, I am writing on the topic of accounting analysis. Before reading of this content, it is basic assumption that your business is large scale and it is being operated more than 5 years.
For doing Accounting Analysis, always remember :
1. # More you dig, more you will know
Just to know one and two years financial statements, you will get nothing. Go deep, dig more and you will know more.
2. # More you give time, more you will know
Dear, this is accounting analysis, this is not the analysis of any new Hollywood film. If your duty is to do analysis of new Hollywood film, you can easily analyze whether it will succeed or defeat because this is entertainment industry and you spend many hours to see movies just for fun. But, for accounting analysis, you have to give time and give more time and more you will know.
Now, I am starting to do Accounting Analysis, please be serious, sit stable and study with concentration :
1. Understand your first Question of Accounting Analysis - From Where will I start Accounting Analysis?
Answer is simple, first of all try to know what is your aim of doing accounting analysis. Different companies do accounting analysis for different purposes. From my view, one aim is single for all companies. That is to increase profitability and net worth by accounting analysis. So, from this point of view, I am doing accounting analysis.
Part One of Accounting Analysis
In this part, we compare our different products' sale and profitability value. We have lots of products. But, do all products give us profit? No, some of our products are disliked by our customers. Suppose, we are producing 1000 types products. Now, we check its sale of last five years and our past 5 years accounting reports will show which products are sold more and which are not sold more. By filter option, we also know which product give us highest profit. Now, we create some relationship between our sale and our earning. Some product's cost will less and profit will high. At that time, we do scrutiny and make list of best products. Basis of best products may be following:
(A) Products whose sale quantity is largest but profit is less. We will continue to produce these products in future because we love our customers and they need such products.
(B) Products whose sale quantity is less but profit is very high. We will make all these types of products because these product's cost is very less. So, these products will our help to survive in recession.
Part Second of Accounting Analysis
In second part, we will concentrate on dates. In accounting, dates are very important. We compare different accounting item's dates. For example, from accounting data, we are interested to know inventory conversion period. Suppose, one product is giving high sale and earning but this earning is in 5 years but other product is generating same earning within 3 months. It means low inventory conversion period is important for us because if inventory do not convert in small time, it means it is very risky.
Part Third of Accounting Analysis
In third part of accounting analysis, we move to fund flow analysis. In this part, compare our current fund's movement with past years' fund's movement.Suppose, if we have to do five years fund flow analysis, we will compare 5 to 4 years, 4 to 3 years and 3 to 2 years and 2 to current year. From where we got fund in last five years' trend and what fund in what project we used and then we make a report which tells us whether we we had chosen good source of fund and whether we used fund correctly in correct project.
Know fund flow analysis concept more deeply at here.
Part Fourth of Accounting Analysis
In fourth part of accounting analysis, we do balance sheet analysis. Balance sheet analysis is to simplify each item of balance sheet. Suppose, balance sheet is showing $ 230 million as deferred revenue. It is nothing important. For better comparison, we first have to simplify it. Suppose, if we convert it in percentage, means 2% of total current liability is deferred revenue. After this, we compare each item of balance sheet with past data. After this, increase or decrease in different items is recorded in accounting analysis report for future planning according to this.
Know balance sheet analysis more deeply at here.
Part Fifth of Accounting Analysis
In fifth part of accounting analysis, we do Ratio Analysis. We calculate profitability ratios, solvency ratios, efficiency ratios and return ratios. We compare it with our standards and with past ratios. With this, we analyze whether our current decisions are good or need to improve them.
Know ratio analysis deeply at here.
Part Sixth of Accounting Analysis
In sixth part of accounting analysis, we do Financial Analysis. Financial analysis is different from ratio and balance sheet analysis. In financial analysis, we compare balance sheet and revenue statements on different basis. Comparison base may be two years or two departments or two branches. After this, we find the result of this comparison.
Know financial analysis more deeply at here.
Part Seventh of Accounting Analysis
This is the last part of accounting analysis. In this part, we see our future risks on the basis of our past financial reports. Every signal of risk is measured just like check up of health of human being.
Know Financial Health Analysis more deeply at here.
For doing Accounting Analysis, always remember :
1. # More you dig, more you will know
Just to know one and two years financial statements, you will get nothing. Go deep, dig more and you will know more.
2. # More you give time, more you will know
Dear, this is accounting analysis, this is not the analysis of any new Hollywood film. If your duty is to do analysis of new Hollywood film, you can easily analyze whether it will succeed or defeat because this is entertainment industry and you spend many hours to see movies just for fun. But, for accounting analysis, you have to give time and give more time and more you will know.
Now, I am starting to do Accounting Analysis, please be serious, sit stable and study with concentration :
1. Understand your first Question of Accounting Analysis - From Where will I start Accounting Analysis?
Answer is simple, first of all try to know what is your aim of doing accounting analysis. Different companies do accounting analysis for different purposes. From my view, one aim is single for all companies. That is to increase profitability and net worth by accounting analysis. So, from this point of view, I am doing accounting analysis.
Part One of Accounting Analysis
In this part, we compare our different products' sale and profitability value. We have lots of products. But, do all products give us profit? No, some of our products are disliked by our customers. Suppose, we are producing 1000 types products. Now, we check its sale of last five years and our past 5 years accounting reports will show which products are sold more and which are not sold more. By filter option, we also know which product give us highest profit. Now, we create some relationship between our sale and our earning. Some product's cost will less and profit will high. At that time, we do scrutiny and make list of best products. Basis of best products may be following:
(A) Products whose sale quantity is largest but profit is less. We will continue to produce these products in future because we love our customers and they need such products.
(B) Products whose sale quantity is less but profit is very high. We will make all these types of products because these product's cost is very less. So, these products will our help to survive in recession.
Part Second of Accounting Analysis
In second part, we will concentrate on dates. In accounting, dates are very important. We compare different accounting item's dates. For example, from accounting data, we are interested to know inventory conversion period. Suppose, one product is giving high sale and earning but this earning is in 5 years but other product is generating same earning within 3 months. It means low inventory conversion period is important for us because if inventory do not convert in small time, it means it is very risky.
Part Third of Accounting Analysis
In third part of accounting analysis, we move to fund flow analysis. In this part, compare our current fund's movement with past years' fund's movement.Suppose, if we have to do five years fund flow analysis, we will compare 5 to 4 years, 4 to 3 years and 3 to 2 years and 2 to current year. From where we got fund in last five years' trend and what fund in what project we used and then we make a report which tells us whether we we had chosen good source of fund and whether we used fund correctly in correct project.
Know fund flow analysis concept more deeply at here.
Part Fourth of Accounting Analysis
In fourth part of accounting analysis, we do balance sheet analysis. Balance sheet analysis is to simplify each item of balance sheet. Suppose, balance sheet is showing $ 230 million as deferred revenue. It is nothing important. For better comparison, we first have to simplify it. Suppose, if we convert it in percentage, means 2% of total current liability is deferred revenue. After this, we compare each item of balance sheet with past data. After this, increase or decrease in different items is recorded in accounting analysis report for future planning according to this.
Know balance sheet analysis more deeply at here.
Part Fifth of Accounting Analysis
In fifth part of accounting analysis, we do Ratio Analysis. We calculate profitability ratios, solvency ratios, efficiency ratios and return ratios. We compare it with our standards and with past ratios. With this, we analyze whether our current decisions are good or need to improve them.
Know ratio analysis deeply at here.
Part Sixth of Accounting Analysis
In sixth part of accounting analysis, we do Financial Analysis. Financial analysis is different from ratio and balance sheet analysis. In financial analysis, we compare balance sheet and revenue statements on different basis. Comparison base may be two years or two departments or two branches. After this, we find the result of this comparison.
Know financial analysis more deeply at here.
Part Seventh of Accounting Analysis
This is the last part of accounting analysis. In this part, we see our future risks on the basis of our past financial reports. Every signal of risk is measured just like check up of health of human being.
Know Financial Health Analysis more deeply at here.
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