The income statement can also be broken down into its component parts and analyzed on a percentage basis.
Percentage Breakdown
Some of the principle items in an income statement, that could be expressed as a percentage of sales, for example, include:
Sales (100% in this example)
Cost of Sales
Gross Margin
Fixed Costs or Overhead
Net Income Before Interest and Taxes
Interest Expense and Financing Costs
Net Income Before Income Tax
Income Tax
Net After-Tax Income
By doing a comparative analysis based on percentages over different periods, you can see how the different components of the income statement are evolving. Here again, graphs would be a useful visual tool.
Saturday, 1 January 2011
Debt Characteristics-5
The total amount of debt your business is carrying is important, but it is also important to know what type of debt you are carrying. In this regard, it can be useful to prepare an analysis, or table of debt characteristics.
Some of the data you may want to include in this type of analysis include:
Type of debt (secured and unsecured bank loans, revolving lines of credit, bonds)
Amount of each type of debt
Interest rate (fixed, variable, and percentages)
Due dates
Annual debt servicing cost
Annual installments
Collateral provided
Having a clear picture of the structure of your debt will allow you to make decisions regarding potential alternative sources of financing, if necessary.
Some of the data you may want to include in this type of analysis include:
Type of debt (secured and unsecured bank loans, revolving lines of credit, bonds)
Amount of each type of debt
Interest rate (fixed, variable, and percentages)
Due dates
Annual debt servicing cost
Annual installments
Collateral provided
Having a clear picture of the structure of your debt will allow you to make decisions regarding potential alternative sources of financing, if necessary.
Parameters-4
Based on your experience with your business and its operations, you may be able to set some parameters or guidelines to use in analyzing the percentages and determining where actions need to be taken to make changes or modifications. The following are some examples:
Current assets (cash and cash equivalents, realizable assets, and inventory) should be greater than, and if possible double the amount of short-term liabilities.
Realizable assets plus cash and cash equivalents should be approximately equal to short-term liabilities.
Owner’s equity should amount to 40% or 50% of total liabilities and owner’s equity.
You may also use benchmarking to compare the status of your business, in terms of relative proportions of different groups of assets and liabilities, with industry standards, or other comparable operations.
Current assets (cash and cash equivalents, realizable assets, and inventory) should be greater than, and if possible double the amount of short-term liabilities.
Realizable assets plus cash and cash equivalents should be approximately equal to short-term liabilities.
Owner’s equity should amount to 40% or 50% of total liabilities and owner’s equity.
You may also use benchmarking to compare the status of your business, in terms of relative proportions of different groups of assets and liabilities, with industry standards, or other comparable operations.
Static and Dynamic Analysis-3
A static analysis of these percentages at any given point in time can be useful. But a dynamic analysis, comparing the evolution of these percentages from period to period can be even more useful in seeing overall trends, and thereby knowing how resources are being allocated, what type of debt is being incurred, and how owner’s equity is being affected by operations.
This type of dynamic analysis can be performed by choosing a certain period or year as a baseline (N), and then comparing the percentages for period N with the percentages for the following period (N+1), or with the percentages from as many other periods (N+2, N+3, N-1, N-2, etc.) as you wish, in order to see the trends over the periods in which you are interested
This type of dynamic analysis can be performed by choosing a certain period or year as a baseline (N), and then comparing the percentages for period N with the percentages for the following period (N+1), or with the percentages from as many other periods (N+2, N+3, N-1, N-2, etc.) as you wish, in order to see the trends over the periods in which you are interested
Vertical Analysis -2
A vertical analysis can then be done by calculating the percentage that each group of assets represents in terms of total assets, and that each group of liabilities and equity represents in terms of total liabilities and equity. A graph of these relationships may be useful for visualizing the relationships.
This vertical analysis will provide you with an idea of where your resources are invested. If your business requires a significant portion of your resources to be liquid, for example, your analysis will probably show a strong percentage in cash and cash equivalents. If it does not, you may need to evaluate ways of freeing up more resources. If the level of inventory you carry is a significant aspect of your business, you will probably want to closely monitor how much of your resources are invested in inventory.
On the liability side, if you have a relatively rapid turnover of working capital, current liabilities will probably be significant. If your business is more capital intensive, with a significant investment in fixed assets, your long-term debt may be a more significant portion of total liabilities.
And while the amount of owner’s equity will vary depending on how your business is financed, how profitable your business has been, and how you distribute earnings, owner’s equity should be maintained at a level that is appropriate for the financial health and solvency of your business.
This vertical analysis will provide you with an idea of where your resources are invested. If your business requires a significant portion of your resources to be liquid, for example, your analysis will probably show a strong percentage in cash and cash equivalents. If it does not, you may need to evaluate ways of freeing up more resources. If the level of inventory you carry is a significant aspect of your business, you will probably want to closely monitor how much of your resources are invested in inventory.
On the liability side, if you have a relatively rapid turnover of working capital, current liabilities will probably be significant. If your business is more capital intensive, with a significant investment in fixed assets, your long-term debt may be a more significant portion of total liabilities.
And while the amount of owner’s equity will vary depending on how your business is financed, how profitable your business has been, and how you distribute earnings, owner’s equity should be maintained at a level that is appropriate for the financial health and solvency of your business.
Financial Analysis-1
Analysis of the Composition of the Balance Sheet
While the basic financial statements – balance sheet, income statement, and cash flow statement - will provide you with valuable information, there are a number of other types of comparisons and analysis you can perform that can give you insights into how you can better manage your business and improve your profitability.
The balance sheet can be broken down into groups of accounts. A comparative analysis of the percentage relationships of the different groups of accounts that make up assets, liabilities, and equity can serve to detect, control, and manage trends or shifts in the composition of your net business resources.
The asset side of the balance sheet can be broken down into:
Cash and cash equivalents, such as deposits and liquid marketable securities,
Realizable assets, including short-term investments, trade accounts receivable from customers or clients, and other receivables,
Inventories, and
Fixed assets.
The liabilities and equity side can be separated into:
Short-term liabilities (payable within one year),
Long-term debt (payable beyond one year), and
Owner’s equity.
While the basic financial statements – balance sheet, income statement, and cash flow statement - will provide you with valuable information, there are a number of other types of comparisons and analysis you can perform that can give you insights into how you can better manage your business and improve your profitability.
The balance sheet can be broken down into groups of accounts. A comparative analysis of the percentage relationships of the different groups of accounts that make up assets, liabilities, and equity can serve to detect, control, and manage trends or shifts in the composition of your net business resources.
The asset side of the balance sheet can be broken down into:
Cash and cash equivalents, such as deposits and liquid marketable securities,
Realizable assets, including short-term investments, trade accounts receivable from customers or clients, and other receivables,
Inventories, and
Fixed assets.
The liabilities and equity side can be separated into:
Short-term liabilities (payable within one year),
Long-term debt (payable beyond one year), and
Owner’s equity.
Quantitative Easing!!!
It was just a concept to me,till i realised it was actually applied in practicality.Its quite scary to know the depth and hows it works in real world.
Here is a link to demonstrate what it exactly is !!
http://www.youtube.com/watch?v=J9wRq6C2fgo&feature=related
http://www.youtube.com/watch?v=a1HeR-bdNwE&feature=related
you can follow on the link and also watch the related videos for better understanding!
Here is a link to demonstrate what it exactly is !!
http://www.youtube.com/watch?v=J9wRq6C2fgo&feature=related
http://www.youtube.com/watch?v=a1HeR-bdNwE&feature=related
you can follow on the link and also watch the related videos for better understanding!
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