Fundamentals of any analysis is well understand business

1. Association of Online Educators- by Aida Makas
Fundamentals of
Business & Financial
analysis

2. CONTENTS
Fundamentals of Business & Financial Analysis
1. How business starts? & How a Business makes money?
2. Fundamentals of Accounting in business
3. What are fundamentals financial reports and how to read
it?
4. Strategic positioning of a business
5. Growing Strategy
6. Profitability and influencing factors on profitability
7. Analyzing a company’s performance

3. 1. How a Business starts?

4. STARTING A BUSINESS….
• It all starts with an idea….
• Purpose: to sell a products/services to
customers to make money
• How to sell to customers in order to make
money?
• In order to be successful, business entity should
find ways to create value for its customers.
Firm/Idea
Product
Customers
Value
Value in $/ Customer
satisfaction

5. What are the goals of a company after it is established?
Create products
Sell products to customer
Make money and reinvest
into capital
Satisfy interested parties
in business
Owners, employees,
public, society, investors, …

6. When is a business profitable?
REVENUE- COST= PROFIT/LOSS
• Revenue ( money coming in a firm after selling good/services)
• Cost (money going out of a firm such as: payroll, utilities, tax,
material…)
• Is it possible to be unprofitable?
* Yes, it is not easy to have all the time profitable business, and
estimations for most of the start-ups and business in general are to not
be profitable first 3 years. In that years so many business drops down.
Examples of not profitable companies (Insta, snapchat, amazon, …)

7. 2. Fundamentals of
Accounting

8. What is a Business in accounting term?
• Commercial organization
• Large or small
• Legally registered
• Exist to make money or profits for its owners
• It may make this money by manufacturing or selling goods or services

9. 3 types of Business
Sole Trader Partnership Company
Business Entities

10. What is transaction and what type of
transactions Business have?
• Whatever property changes hands, there has been a business
transactions
2 types of transactions:
- Cash Transactions (where the buyer pays cash to the seller at the
time the goods or services are transferred
- Credit Transactions (Sale or purchase which occurs some time earlier
than cash is received or paid)

11. What is Accounting?
• Recording, summarizing, analyzing and classifying financial business
transactions
• 5 pillars of accounting
• The Accounting Equations
Assets= Liabilities + Capital
Assets Liabilities Capital Expenses Income

12. Bookkeeping roles
• Assets and Expenses
• Liabilities, Capital and Income
• Every Debit entry has credit entry
Debit
Credit
Credit
Debit

13. 3. Main Financial Statements

14. 3 Financial Statements
• Business managers, lenders and investors nee to know the financial
condition of a business
• For this purpose they need a report that summarizes its assets and
liabilities as well as the performance of the business whether it is loss
or profit.
• 3 Major financial statements include:
• Balance sheet
• Statement of profit or loss (income statement) and
• Cash flow
• Additional statements:
• Statement of changes in equity and
• Notes to the Financial statements

15. Statement of profit or Loss
• Old Names:
• - income statement
• -Statement of Comprehensive income
• Shows the Financial performance of the business compared to the
last year
• Shows all the income earned by the business and all the expenditure
incurred by the business over a period of time, typically a year
• It consists of the 2 out of the 5 pillars of accounting those are Income
and Expenses

16. Single step Income Statement
Single Step Income Statement
Sales/ Revenue $ 52,000.00
Cost of Good Sold $ (33,800.00)
Selling General and Administrative Expenses $ (12,480.00)
Depreciation Expenses $ (785.00)
Interest Expense $ (545.00)
Income Tax Expenses $ (1,748.00)
Net Income $ 2,642.00

17. Statement of Financial Position
• Old Names:
• - Balance sheet
• Shows the Financial Position of the business to date today from the
date business was started
• It is made up of accounting equation called
Asset= Capital + Liabilities (3 out of 5 pillars of accounting)

18. Statement of Cash Flow
• Is about recording the movement of cash during the year
• Statement of Cash Flow is broadly made up of:
1) Operating activities (60%)
2) Investing activities (20%)
3) Financing activities (20%)
2 methods of calculating cash from operations:
1) Direct method
2) Indirect method (recommended by standard)

19. Connections Between the 3 Financial statements
Year-End Balances Change During Year
Single Step Income Statement Assets Statement of Cash Flows
Sales/ Revenue 52,000.00$
3,265.00$ Cash (470.00)$ Operating Activities
Cost of Good Sold (33,800.00)$ 5,000.00$ Accouts Receivable 320.00$
8,450.00$ Inventory 935.00$ Net Income(from Income Statement) 2,642.00$
Selling General and Administrative Expenses (12,480.00)$ 960.00$ Prepaid Expenses 275.00$ Changes in:
16,500.00$ PPE 3,050.00$ Accounts Receivable (320.00)$
Depreciation Expenses (785.00)$ 5,575.00$ Intangible Assets 575.00$ Inventory (935.00)$
(4,250.00)$ Accumulated depreciation (785.00)$ Prepaid Expenses (275.00)$
Interest Expense (545.00)$ 35,500.00$ Total Assets 3,900.00$ Depreciation 785.00$
Accounts Payable 645.00$
Income Tax Expenses (1,748.00)$ Liabilities Accrued Expenses Payable 480.00$
Income Tax Payable 83.00$
Net Income 2,642.00$ 3,320.00$ Accounts Payable 645.00$ CF from Operating Activities 3,105.00$
1,515.00$ Accrued Expenses Payable 480.00$
165.00$ Income Tax Payable 83.00$ Investing Activities
3,125.00$ Short - Term Notes Payable 125.00$
4,250.00$ Long- Term Notes Payable 500.00$ PPE (3,050.00)$
Intangible Assets (575.00)$
Shareholder's Equity CF From Investing Activities (3,625.00)$
8,125.00$ Capital Stock 175.00$ Financiang Activities
15,000.00$ Retained Earnings 1,892.00$
Short-Term Debt 125.00$
35,500.00$ Total Liabiities And Shareholder's Equity 3,900.00$ Long-Term Debt 500.00$
Issue of Additional Capital Stock Shares 175.00$
Cash Dividiends from Profit (750.00)$
CF From Financing Activities (50.00)$
Net Cash (470.00)$
Balance sheet

20. 4. Strategic positioning of a
Business

21. Strategic positioning of a business
• Understanding a company’s positioning strategy is the key to
understanding its business
Cost Leadership
(A firm sets out to become the low cost
producer in its industry)
Example: Ikea
Differentiation
(A firm seeks to create unique products
that satisfy buyer needs, hence
charging them a premium )
Example: Louis Vuitton
Cost Focus
(cost leadership in a targeted
segment – the firm tries to
address just one part of the
market)
Example: Zara
Differentiation Focus
(the firm tries to address just
one part of the market)
Example: Armani Jeans
BroadNarrow
CompetitieveScope
DifferentiationLower Cost
Competitive Advantage

22. Strategic positioning of a business
• Understanding a company’s positioning strategy is the key to
understanding its business
Cost Leadership
(a company is able to sell high
volumes(to many people ) at low price
Differentiation
(A company has a limited number of
clients and sells lower volumes at a
premium price
Cost Focus
(A company sells the cheapest
product in a particular niche of
the market
Differentiation Focus
(A Company that sells a
premium product to a niche
client group
BroadNarrow
CompetitieveScope
DifferentiationLower Cost
Competitive Advantage

23. 5. Growing a Business

24. What factors influence the Growth of Sales?
• Macroeconomic: the overall state of the economy in the region
• Industry: Industry where operates
• Competition
• Company specific factors: know-how, organizational structure,
resources, strategic focus, brand…

25. 6. Profitability

26. What factors influence the Profitability?
• Revenue- Cost= Profitability
• Revenues:
- Sales of products or services
- Other income
• Cost:
- Cost of Good sold
- Wages
- Utilities
- Rent
- D&A
- Interest expenses
- Taxes….

27. What factors influence the Profitability?
• Supply Chain Bargaining power
• Clients Bargaining power
• Competitive pressure
• In-house efficiency

28. 7. Analysis – how to start

29. How to analyze company’s past performance?
• Horizontal analysis
- Analysis of development of given parameters over time
- 2 Main formulas for horizontal analysis: Year-on-year growth and CAGR (Compound annual growth year)
- Year –on- year growth shows the growth between 2 years, while CAGR allow us to see the average
growth of larger number of periods
Example :
Year-on – year = Revenue 2017/ Revenue 2016 -1
CAGR= (Ending Value/ Beginning Value) (1/# of year)

30. How to analyze company’s past performance?
• Vertical analysis
- Means, each line item of financial statement is listed as a percentage of another item
Examples:
COGS %= COGS/ Revenue
Gross profit %= GP/Revenue
Net income%= NI/ Revenue
- Vertical analysis helps us understand how a firm makes its money and how efficient it is in carrying out its
business operations.

31. How to analyze company’s past performance?
• comparative analysis
- Peer analysis- to do this type of analysis analyst has to:
- Make a list of the companies in the industry and compare following:
- Size
- Product portfolio
- Strategic positioning
- Maturity
- Type of clients
- Distribution channels…

32. How to analyze company’s past performance?
• deep analysis of main type of items
- Make analysis of next:
- Revenue: geographic, product breakdown, distribution channels, key clients
- Gross profit: (profitability per product, per client, per segment) , negative GP alarm!
- EBITDA: Earnings before interest, taxes, depreciation and amortization. Shows the company’s profitability
after taking into consideration COGS and Operating expenses. Shows development of operating business.
Negative EBITDA shows that a company has big problems with its core business and operating cash flow
- Net profit: profit or loss that company has generated after all expenses are taken into consideration
- Financial Leverage & Interest Expenses (financial debt vs. Equity): Ratios to look at:
• Company’s borrowing rate (interest expenses/Financial debt)
• Leverage (Financial debt/Equity)
• Leverage of comparable companies
• Coverage ratio (EBITDA/Interest expenses)
- Working Capital: Receivables + Inventory - Payables

33. How to analyze company’s past performance?
• deep analysis of main type of items
- Working Capital: Receivables + Inventory - Payables
- Trade Receivables= money owed by customers
- Trade payables= money owed by suppliers
- Inventory= value of goods in the warehouse
- DSO= Accounts receivable/revenues *365
- DPO= Trade payables/COGS* 365
- DIO= Inventory/ COGS*365

34. Summary
- Each business starts with an idea
- To be profitable business must satisfy its stakeholders and shareholders
- To run the business we have to know where we want to go? And what is our vision? To
develop strategy
- Accounting helps company measure its business activities in numbers
- Financial analysis helps business analyze its performance based on historical data and
forecast the future
- Three major financial statements: Income Statement, Balance sheet and Cash flow
- Two major transactions : cash and credit

35. Thank you!