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Analyze and Report

11 SEP 2012
Career Path : Accounting

“Business as usual” is an expression we often hear, but how does it realistically apply to many of today’s larger companies? The answer is simple with small businesses which operate on a very simplistic formula of making something or providing a service, selling the product or service, using the money from the sale to keep the business going and hopefully having some leftover for profit. But simplicity is rarely a factor with corporations or large companies. There are far more factors to consider and analyze when it comes to making business decisions, and for this reason we have the specialized role of the accountant to help asses and shape more complex decisions.

 

If a company isn’t simply operating on a “business as usual” basis, it is most likely because it is constantly making plans to widen the scope of their business activities. This means developing new projects, expanding into new markets, buying or merging with other companies, investing in new equipment, or even considering the issuing stocks.

 

Accountants must be experts at creating and analyzing financial ratios from various financial data received from a company, like balance sheets, cash flow statements, income statements, company performance history, comparisons with other companies, and even future projections.

 

Once the figures have been laid out and their relationship to each other has been plugged into the ratio formulas, the main purpose of financial analyses is to determine four key factors: solvency, profitability, liquidity, and stability. The accountant then reports to the company’s managers, allowing them to make more informed decisions.

 

Being able to formulate these ratios makes up an extremely important part of accounting training. From there, the accountant will look at those key factors:

 

 

Solvency

 

How much money and asset value does a company have, and how much are they expecting to make? Take these figures and subtract from them how much a company owes in total over a period of time. This is solvency, or in other words, a company’s ability to meet its expenses, pay off its debts, and continue to grow.

 

Profitability

 

Unlike profit, which is a fixed number that simply refers to how much money is made from a sale or other business activity, profitability considers a company’s ability to make profit over a period of time. This figure is then directly related to the ability of a company to sustain growth and potentially increase profits.

 

Liquidity

 

Also considered over a specific time period, in this case a short time, liquidity is the company’s capability to meet is every day expenditures and liabilities. Unlike profit, liquidity measures positive cash flow against immediate debt.

 

Stability

 

Where liquidity takes a short-term view of a company’s cash flow, stability is focused on the long term. This often considers that business will remain relatively stable and does not take into consideration unexpected significant losses, in other words, assuming business goes on “as usual.”

 

These may seem like simple descriptions but in fact these concepts can be sometimes tricky to understand and differentiate when one has mountains of data to sort and organize. It is not uncommon for an accounting diploma program to focus on training future accountants in these subjects extensively.

 

Visit Mohawk College for more information on accounting courses and other business programs.