Assess Financial and Competitive Advantage in A Corporate Business

As a manager, financial analysis is necessary for making company decisions. There are some tools that are used in analyzing the finances that must be understood by every manager. There is breakeven analysis which indicates how much must be sold to pay for fixed investment. The second tool is fixed costs, costs that remain largely the same and have no effect on how many units of product or services are sold. And then, variable costs are costs that change with the number of units produced and sold. Last but not least, contribution margin is the amount of money contributed per unit sold to pay for fixed costs breakeven volume is fixed costs divided by the contribution margin of each unit sold and operating leverage describes the relationship between fixed and variable costs.

Until now, many analysts saw that net income as a valid key parameter to describe how a company is performing. However, to learn how the company’s situation is, the company should operate using different cash flows, which consist of Equity Cash Flow (ECF), Free Cash Flow (FCF), and Capital Cash Flow (CCF). It caused that cash flow consists of one figure, while net income depending on the criteria applied. Profit after tax (PAT) equals cash flow equity when the company is not growing. Accounting cash flow is the same as equity cash flow in that the company does not increased, keeps debt constant, only writes off or sells assets that are fully depreciating, and does not buy fixed assets. When making projections, dividends and other payments for shareholder estimates must exactly match the expected equity cash flows.

For this reason, a business should not rely on resources from other parties and financial planning skills. It because the life of a business depends not only on its ability to generate profits but also on its ability to pay its debts due. The difference between profit and cash assets is the basis for understanding any financial statement. Financial statements are based on the accrual concept and therefore operating income disclosed in the financial statements will often differ significantly from the cash flows generated from operations. The cash flow statement is part of the financial statements to receive an understanding of changes in net assets, financial position, and the entity’s ability to adapt to changes during an accounting period classified according to operating, investing, and financing activities. Calculate the cash operating cycle is an efficient technique when looking at financial statements. It will show an estimate of the amount of time it will take to convert a product or service into cash. The return on capital employed (ROCE) is a fundamental measure of business performance by comparing inputs (capital) with outputs (operating profit).

Cash flow is the primary indicator of a company’s financial health besides profitability and shareholder equity, which is beneficial for assessing company performance. Free cash flow is one of Wall Street’s favorite measures of cash flow remaining after a company pays its operating costs and investment needs. Warren Buffet’s Berkshire Hathaway is an example of a company best known for using a company’s performance measurement with free cash flow. The concept of return on investment (ROI) can also be work to make decisions and assess company performance. However, the weakness of this concept does not take into account the timing of cash flows. The timing of cash flows is necessary and should be estimated in management decisions. For this reason, the company’s financial decision-making tools must also take into account the time value consisting of present and future value, net present value (NPV), and internal rate of return (IRR).

In addition to the above measurements, companies also need to consider other standard financial ratios to assist companies in analyzing their business performance. This ratio consists of profit ratio (measures the company’s use of its resources), activity ratio (shows how effectively a company manages its assets), liquidity ratio (measures the company’s ability to meet its short-term obligations), leverage ratio (measures the company’s ability to meet its long-term obligations), and the shareholder-return ratio (measures the returns obtained by the company’s shareholders.

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