Fundamentals of Business Analysis Lecturer: Dermot Bradfield Student:Vitalijs Kaniscevs Programme: BSHC2
Purpose
Financial analysis is a process of studying the financial condition and main results of a company's financial activity in order to identify reserves to increase its market value and ensure further effective development. Also Financial analysis is used to understand the financial aspects of an investment and solutions.
Financial analysis is an estimation of the financial viability of an investment option, the financial benefit from its implementation, stability. It looks at the total costs, the benefits of using and supporting the solution, and the total cost of the changes
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The business always develops due to investments and the correct most accurate analysis is an integral part of any initiative. Any initiative should be studied by financial analysts, correctly predicted in terms of financial investments and beneficiaries, tracked at various times, studied , changed on time, if necessary. Success of investments depends From financial analysis, it helps to protect the business from financial losses and predict cash flow and return of investment.
Business analysts use financial analysis to make a recommendation for prospective investments by comparing one solution or several solutions with others.
Methods of Financial Analysis
1.Cost of change
The cost of changes is divided into several groups, which include various elements associated with the stages of investment in the project.
1) the expected cost of the initial base costs for the acquisition of fixed assets that will be used in the project (buildings, facilities, equipment)
2) the expected cost associated with changing the properties of fixed assets (engineering changes, software changes), personnel, and other resources that may be involved in the project implementation.
2.Total Cost of Ownership (TCO)
TCO= (Purchase Price ( asset) + Costs of
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NPV is used to analyse the profitability of a project or investments
NVP=( Present Value(inflow) – Cost of Investment(outflow))
Internal Rate of Return(IRR)
This is the rate of return (the discount rate) at which the net present value of the investment is zero, or that is the discount rate at which the discounted income from the project is equal to the investment costs
NPV(Net Present Value) =(-1 x Original Investment + Sum (Net benefit for relevant period) / (International Rate Return (all periods)+1) = 0.
Payback Period
The payback period is the length of time required to recover the cost of an investment.
Financial Analysis Advantage
Allows management to objectively compare very different investments from different perspectives.
Forecasts of benefits and costs, as well as financial calculations are set out in a way that can be changed at any time
If the requirements of business or interested parties change, the business analyst can change the recommendations based on the change in initiative
Financial Analysis
Discounted cash flow is a valuation technique that discounts projected cash inflows and outflows to evaluate the potential value of an investment. There are three discounted cash flow methods: Net Present Value (NPV), Profitability Index (PI) and Internal Rate of Return (IRR). The net present value discounts all cash inflows and outflows at a minimum rate of return, which is usually the cost of capital. The profitability index refers to the ratio of the present value of cash inflow to the present value of cash outflows. The internal rate of return refers to the interest rate that discounts cash inflow projections to the present to ensure that the present value of cash inflows is equivalent to the present value of cash outflows (Brown, 1992).
...h the full expenses included. Challenge overseeing and incorporating over a huge supply change and developing patterns.
Time-phased project work is the basis for project cost control. Work package duration is used to develop the project network. Further, the time-phased budgets for work packages are timetabled to establish fiscal measures for each phase throughout the project. The time-phased budgets are to emulate the real cash needs of the budget, which will be used for project cost control. This information is useful to estimate cash outflows. The project manager's attention is on when the costs are to occur, when the budgeted cost is earned, and when the actual cost materializes. This information is made up to measure project schedule and cost variances (Gray & Larson, 2005). The following are typical types of costs found in a project:
Should financial decisions be put on hold until the markets become stronger? Is it more profitable to act now to better position the company’s market share?” These are all questions that could be clearly answered if the managers had a magical financial crystal ball. In lieu of the crystal ball, managers have a way of calculating the financial risks with some certainty to better predict positive financial investment outcomes through the discounted cash flow valuation (DCF). DCF valuation is a realistic approach, a tool used, to “determine the future and present value of investments with multiple cash flows” over a particular period of time which is incurred at the end of each period (Ross, Westerfield, & Jordan, 2011). Solutions Matrix defines DCF as a “cash flow summary adjusted so as to reflect the time value of money (The Meaning of Discounted Cash Flow, 2014).” The valuation of money paid or received in the future has less monetary value if that same money was to be received or paid today (The Meaning of Discounted Cash Flow, 2014). This cash flow evaluation helps managers in their determination whether or not to invest in research and development, purchase more equipment, enlarge floor space, and increase laborers, or instead, retain net profits. Either way, the DCF valuation gives
...n a mix of fixed and variable costs as well as other influences such as learning curves, the manufacturer will experience reduced incremental costs for each additional unit purchased above each tier’s minimum purchase quantity. The main goal of the below methodology is to capture the inefficiencies of minimum purchase quantities and purchase based on true costs.
Businesses face lots of challenges today during their development and growth, and they should decide how much financial investment are they want to put into the development of certain projects.
Software development project managers should prepare several types of cost estimates for most projects. Three basic types of estimates include a rough order of magnitude or ROM, a budgetary estimate, and a definitive estimate.
...nt costs are allocated using different factors. This is because to determine the magnitude and the scope of a certain cost, there must be some factors to be considered. Hence different categories of costs are treated differently and are allocated cost differently. Hence it is clear that cost allocation is a noble requirement for every project.
Capital expenditures as well as merchandise sales make an impact on financial statement but they both do it in a different way. A capital expenditure doesn’t usually make an immediate impact but it may immediately affect a financial statement depending on the type of asset. When it comes to merchandise sales there are a few ways it will affect the financial statement but it depends on how the merchandise was sold. There are many ways that capital expenditures as well as merchandise sales will affect the financial statement but how they do this is dependent on certain factors during the transaction.
...Is defined as a change in the Total cost once an extra unit of an item is manufactured. It can comprise of material costs, labor and a small percentage of fixed costs like selling expenses and administration expenses (Walther, n.d.).
Making business decisions involves choosing between alternative courses of action. Many factors affect business decisions, yet analysis typically focuses on finding the alternative that offers the highest return on investment or the greatest reduction in costs. Some decisions are based on little more than an intuitive understanding of the situation because available information is too limited to allow a more systematic analysis. In other cases, intangible factors such as convenience, prestige, and environmental considerations are more important than strictly quantitative factors. In all situations, managers can reach a sounder decision if they identify the consequences of alternative choices in financial terms. This unit
Analyzing in terms of investment, if a private investor puts money into a company he has an expectation of both risk and return on the investment. Given a particular level of risk, the investment needs to be expected to have a particular level of return. For example, investment in a start-up needs to have the potential for a very high return, given the higher risk of failure, while investment in a large established business can be coupled with a lower expected return, given the lower risk of failure.
Prospective investors make use of financial statements to assess the viability of investing in a business. Financial analyses are often used by investors and is prepared by professionals (financial analysts), thus providing them with the basis in making investment decisions.
The physical- financial entity is a balance of two different components working towards the same common goal. Each one has their areas of focus and attributes to contribute to the project. If one has more influence than the other, an imbalance could occur and result in problems with the development and its success. The physical side must work with the architects, engineers, and construction team to create the schematic design and budget possibilities for the project in the predevelopment stage. This will include alternatives and rough preliminary designs. When the development moves over to the document development stage, they become responsible for the construction documents, budgeting, and schedules for the actual construction of the project. The financial side of the development involves the business side of the project. This is where the market and marketability studies will be conducted and various feasibility and investment analysis reports will be submitted. The financial entity of the development will continue to work through the predevelopment and document development stages to put forth the best suited analysis for the market, feasibility, and marketability studies.
Present theoretical arguments for the choice of net present value as the best method of investment appraisal;