The four main financial statements are the income statement, statement of retained earnings, balance sheet, and cash flow statement. All four statements are interrelated and allow the user to more fully understand the financial performance of the business through the analysis of its financial statements.
Vertical analysis definition: A technique of analyzing financial statements by restating each line item (e.g. sales and marketing expenses) as a percentage of another base line item (e.g. Revenue). The horizontal analysis reports are not required by Accounting Standards, and are used more as a management tool rather than a formal reporting document.
A nonprofit organization (NPO) is an organization that has no owners and which uses its net income to help it achieve the aims for which it was established. All surplus net income has to be kept within the organization, and not paid out as dividends or distributions.
There are three main not for profit financial statements, the statement of financial position, the statement of activities, and the statement of cash flows.
It is quite feasible for a business to show a healthy balance sheet and be profitable, but if it runs out of cash it will fail.
The balance sheet only shows the position at a particular point in time, and the income statement deals in profit not cash. The purpose of the business cash flow analysis is to correct this situation.
The free cash flow measures the amount of cash flow available for a business to use for growth and to take advantage of expansion opportunities.
The Excel free cash flow calculator, available for download below, is used to compute free cash flow by entering details relating to the net credit sales and the opening and closing accounts receivable balances.
The payback period is the time it takes to earn back the cash invested in a project. It allows a business to determine how long it will take before a project will recover it’s original investment.
The simple payback period, is a useful tool for a business to compare projects. Using the payback period method, the business would choose the project which has the shortest cash payback period.
Free cash flow (FCF) is calculated by taking the operating cash flow and deducting the capital expenditure.
The purpose of free cash flow is to see what cash is available (free) from the operations of the business after allowing for cash to maintain the current growth rate. This free cash flow is then available to improve growth by taking advantage of expansion opportunities, invest in new products, and to reduce debt and pay dividends to equity providers.
In order to manage its cash flow a business needs to understand the working capital calculation. Working capital is the amount of cash needed to fund the normal day to day trading operations of the business. In a simple business it would be calculated as Inventory + Accounts receivable – Accounts payable representing the funding needed to buy inventory and provide credit to customers reduced by the amount of credit obtained from suppliers.