Financial Evaluation Techniques
The financial department of a company does not deal with the daily cash flow of the business. Instead, it deals with the long term financial planning of the company. Financial analysts use certain techniques to determine how to plan for financial goals and how the company should structure its budgeting in the accounting department to reach a stronger financial standing in the eyes of investors and shareholders.
One of the main evaluations the financial department conducts is an assessment of the company’s net worth, which is highlighted in the company’s annual report with the hopes of attracting potential investors and stockholders. The net worth of a business is the total sum of the liabilities subtracted from the owned asset values of the business. If the company has a negative worth due to outstanding banking loans and unpaid taxes, the financial evaluation may lead analysts to create a plan to lower the liabilities and increase the assets.
A business has a monthly operational budget that shows how much the business has in income and how much it has in expenses. A financial evaluation of the company can include analyzing the monthly budget to see how the business is spending money. To earn a profit, the company must spend less than it is earning to have a monthly profit. One financial evaluation technique is to add up everything the company is spending on a monthly basis and compare it to the income. Financial planning and adjustment may be needed if the business has a negative income each month.
Another evaluation technique is to analyze the current financial plans and its goals. A financial plan is constructed around a set amount of financial goals that indicate what the company wants to achieve. Business owners may set unrealistic goals, so one financial evaluation technique is to look over the financial plan and determine whether the goals are realistic based on the income of the business and overall spending.
The financial standing of a company can be improved by changing the company’s approach to the market. Financial analysts may spend time analyzing the market in terms of its growth potential for the particular products or services the business offers. If the company already has many direct competitors on the market, the financial analysts may see earning potential if the company takes the product development or services in a slightly different direction. This type of financial evaluation technique is a pre-planning technique.