Types of financial analysis

Financial analysis involves the review of an organization's financial information in order to arrive at business decisions. This analysis can take several forms, with each one intended for a different use. The types of financial analysis are:

• Horizontal Analysis This involves the side-by-side comparison of the financial results of an organization for a number of consecutive reporting periods. The intent is to discern any spikes or declines in the data that could be used as the basis for a more detailed examination of financial results.
• Vertical Analysis This is a proportional analysis of the various expenses on the income Statement, measured as a percentage of net sales. The same analysis can be used for the balance sheet. These proportions should be consistent over time; if not, one can investigate further into the reasons for a percentage change.
• Short term analysis. This is a detailed review of working capital, involving the calculation of turnover rates for accounts receivable, inventory, and accounts payable. Any differences from the long-term average turnover rate are worth investigating further, since working capital is a key user of cash.
• Multi-company comparison. This involves the calculation and comparison of the key financial ratios of two organizations, usually within the same industry. The intent is to determine the comparative financial strengths and weaknesses of the two firms, based on their financial statements.
• Industry comparison. This is similar to the multi-company comparison, except that the comparison is between the results of a specific business and the average results of an entire industry. The intent is to see if there are any unusual results in comparison to the average method of doing business.

What Is Financial Analysis

Financial analysis refers to an assessment of the viability, stability, and profitability of a business, sub-business or project. It is performed by professionals who prepare reports using ratios that make use of information taken from financial statements and other reports.

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Theoretical Capacity Management Concept

Theoretical Capacity is the amount of throughput that could be attained if a production facility were able to produce at its peak efficiency level with no downtime. Theoretical capacity should not be used for planning or bonus compensation purposes, since it is nearly impossible to attain in practice. The following factors can interfere with the ability of a facility to attain its theoretical capacity:

• Scheduled maintenance
• Unscheduled maintenance
• Raw Materials shortages
• Equipment replacements
• Labor shortages
• Power failures
• Acts of God, such as flooding and earthquakes

Theoretical capacity is also known as ideal capacity.

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Practical Capacity Management Concept

Practical capacity is the highest realistic amount of output that a factory can maintain over the long term. It is the maximum theoretical amount of output, minus the downtime needed for ongoing equipment maintenance, machine setup time, scheduled employee time off, and so forth. The amount of practical capacity should be incorporated into an organization's budget, so that production is not planned at a level so high that it cannot be sustained.

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Nonproductive Capacity Management Concept

Nonproductive capacity is that amount of production capacity that is temporarily not usable. The amount of resulting downtime can have a number of causes, such as:

• The time required to set up a new production run
• The time required for scheduled maintenance
• The time required for unscheduled maintenance
• The time lost due to the production of units that had to be scrapped or reworked

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Normal Capacity Concept

Normal capacity is the amount of production volume that can be reasonably expected over the long term. Normal capacity takes into account the downtime associated with periodic maintenance activities, crewing problems, and so forth. When budgeting for the amount of production that can be attained, normal capacity should be used, rather than the theoretical capacity level, since the probability of attaining normal capacity is quite high. The normal capacity level can decline over time as production equipment ages, since the equipment requires more maintenance effort.

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Idel Capacity Concept

Ideal capacity is the maximum output that a manufacturing facility can produce, assuming no downtime and no waste. It is nearly impossible to attain the ideal capacity figure, since it involves 24x7 production with no maintenance downtime, no employee breaks, no damaged equipment, and no reworked goods. The concept can be used in budgeting for the output of a production facility but is not recommended, since the actual output will certainly be lower, generating an unfavorable variance.

Ideal capacity is also known as theoretical capacity.