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.

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Capacity Utilization Rate

The capacity utilization rate is the proportion of the production capacity of a business or economy that is currently in use. For example, when an organization has a capacity utilization rate of 80%, it means that the firm is currently operating at 80% of its theoretical capacity. The concept can be misleading from several perspectives. First, a firm should only produce as many products as are immediately needed; any additional use of capacity is only going to result in unneeded products that will be stored as inventory, resulting in unnecessary inventory holding costs and the risk of obsolete inventory. Second, the measure is based on a theoretical capacity level that is unsustainable over the long term, since downtime is needed for repairs and maintenance.

A better view of the capacity utilization rate is to focus it solely on the bottleneck operation of a business. The firm cannot generate any additional throughput unless this one operation is properly managed to achieve the highest possible utilization rate. Focusing on the capacity utilization of any other work center in a business is actually counterproductive, since doing so creates an inherent incentive to increase its usage, even when it is not necessary to do so.

When viewed from the perspective of an entire economy, the capacity utilization rate measures the potential amount of slack in the economy. When the utilization rate is low, it implies that the economy can easily absorb significant increases in growth. The economy must grow enough to absorb this slack before there is any incentive for capital investments to be made.

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Capacity 

Capacity is the maximum sustainable rate of output that an operation can achieve. The amount of capacity limits the revenue that a business can generate.A business can improve upon this capacity level by closely managing its bottleneck operation. A business may build up an excess amount of capacity as a reserve, if it tends to experience peak loads that are well above the average level.

Capacity Management Concept 2

Budgeted capacity Concept
Budgeted capacity is the best estimate of production volume planned for a future period. This amount may be expressed in aggregate hours of available production capacity, or just the planned hours that will be available at the bottleneck operation. Budgeted capacity is used to estimate likely sales levels, as well as to calculate a planned overhead application rate.

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1. Activity Capacity Management Concept
Activity capacity is the rate of output of an activity over a protracted period of time, assuming the existence of normal operating conditions. Normal conditions involve a reasonable amount of down-time for employee breaks, maintenance, shift changes, and so forth. Activity capacity is incorporated into the budgeting.process for the production area, to determine the amount of goods that the process can actually generate. The outcome of this analysis can be a decision to invest in more manufacturing equipment in order to increase the amount of capacity.

difference between Assets and Liablities

The main difference between assets and liablities is that assets provide a future economic benefit, while liabilities present a future obligation. An indicator of a successful business is one that has a high proportion of assets to liabilities, since this indicates a higher degree of liquidity.