THE NECESSITY OF ECONOMIC ANALYSIS A GAZDASÁGI ELEMZÉS SZÜKSÉGESSÉGE. ANDREA PAP captain

Transcription

1 VÉDELEM GAZDASÁGTAN ANDREA PAP captain THE NECESSITY OF ECONOMIC ANALYSIS A GAZDASÁGI ELEMZÉS SZÜKSÉGESSÉGE Ezen témában már megjelent publikációimat mintegy keretbe foglalva a cikk összegzi a gazdasági elemzés néhány információforrását, amelyek elengedhetetlenek a vállalkozások vagy költségvetési szervek komplex elemzéséhez, illetve bemutatja az elemzés szükségességét. Egy vállalkozás gazdálkodásának átfogó elemzésére a számviteli beszámolók alapján kerül sor. Az éves beszámoló elemzésének feladata az adatok megfelelı felbontása és csoportosítása, amelyek alapján olyan információk nyerhetıek, amelyek tájékoztatást adnak a gazdaság szereplıi számára az adott vállalkozással kapcsolatban. Kulcsszavak: gazdasági elemzés, komplex elemzés, számviteli beszámoló, gazdasági szereplık Based upon my articles published to date, this paper summarizes some of the sources of information for an economic analysis, which are indispensible for the complex analysis of companies and budgetary institutions, and it also points out the necessity of the analysis. The comprehensive analysis of a company s business administration is carried out on the basis of accounting statements. The task of the analysis of the annual report is the appropriate breakdown and classification of data, which can eventually yield vital information about the given company for the economic players to consider. Keywords: economic analysis, complex analysis, accounting statements, economic players. After the change of regime in Hungary started on its way towards a market economy. Changing the economic structure and adjusting it to international norms has been the task of the past couple of decades and is also the task of the present and the future. One of the most important parts of this is the modernization of the accounting and information system, adjusting it to international principles and adapting it to the economic processes. In parallel with these a system of reporting has been established that satisfies the information requirements of the owners, creditors, employees, managers and competitors of Hungarian 167

2 companies, since it is essential for the economic actors to have sufficient information about the financial status, liquidity and earning power of the enterprises in their scope of interest. In possession of the necessary information they are able to make the right decisions, set and achieve the right objectives and thus be profitable. Therefore, economic analysis plays a very important role, which is even more highly valued under market conditions. Later the paper discusses the importance and necessity of economic analysis and also its sources of information and briefly presents the essence of the analysis of the financial status, liquidity and the earning power of businesses. 1. Economic Analysis 1.1. The Importance of Economic Analysis In a market economy the judgement, evaluation and continuous control of the operation of enterprises are of utmost importance. In order to get a realistic picture of a business, the appropriate methods of analysis are needed. The development of the forming Hungarian market economy requires that useful information should be available about the market players. With the introduction of the obligation for private enterprises to make an annual report, the Act on Accounting requires a kind of assessment of business events, which can also be necessitated by other economic events. For the competitors and business partners it is essential that the information available about enterprises should be properly evaluated. 1 As a result of the changed political, economic and financial situation and the accelerated economic and financial processes, the assessment, analysis and evaluation of the financial status, liquidity and earning power of enterprises have become vital for both the owners of the business and other interested parties so that objective information about the business will be available to them on which their decisions can be based. The comprehensive analysis of the business administration of an enterprise is most commonly carried out on the basis of accounting statements. The possibilities for analysis and evaluation are affected by 1 Dr. Béhm Imre,

3 VÉDELEM GAZDASÁGTAN the layout of the accounting statement. The economic analysis numerically assesses those events and circumstances which affect the business administration of the enterprise, the decisions of the management and the actions taken. The analysis ensures the achievement of optimal results by working out the various economic decisions. In addition to the achievements, it also highlights the shortcomings and makes recommendations for their elimination The sources of information for the analysis The analysis does not only provide information for the market players but it also requires information. The sources of this information can be the internal regulations of companies, laws, the rules of law in force and accounting. A single comprehensive information system is needed which contains all the data of each unit, and which gives a reliable and realistic picture of the financial status, liquidity and earning power of enterprises. This is assisted by the accounting system of businesses. The starting point for the analysis is the annual report. The Act on Accounting sets forth annual reporting and bookkeeping obligations for economic entities that come under the Act. The aim of the annual report is to give a true and reliable demonstration of an undertaking s financial status, liquidity and earnings power and the changes in them, which the users will find expedient when making economic decisions. Annual reporting obligation: The economic entity is obliged to prepare an annual report on its operation, financial status, liquidity and earnings position, following the closure of the books of the financial year. The report must be written in the Hungarian language and must be supported by statutory bookkeeping. The aim of the accounting statement is to give a true and fair demonstration of the economic entity s financial status and its components (assets and liabilities), its liquidity and the results of its economic activities. Beyond the statutory requirements further information must be given in the supplement if the application of the statutory requirements and that of the accounting principles are not sufficient to give a true and fair picture in the balance sheet and the income statement. 2 2 Act C on Accounting of (1), (2), (3) 3 Act C on Accounting of (1), 88. (1) 169

4 Bookkeeping obligation: Bookkeeping is recording all the financial transactions that take place during the activities of the economic entity and affect its financial status, liquidity and earnings position. Books have to be kept in accordance with the statutory requirements and they have to be closed at the end of the financial year. 3 The annual report consists of the following parts: The balance sheet shows the net worth of the enterprise in monetary value on any given date and contains all its assets and liabilities, the provisions, the accruals and deferrals and the accounts payable. 4 In the balance sheet the assets are classified according to their purpose and use as long and short term investments and deferred charges. The liabilities are arranged on the basis of funding and considering deferred income. Based on the data shown in the balance sheet, it is possible to assess the financial status and liquidity of the enterprise. The income statement (also called the profit and loss statement) shows the income and cost of sales of the enterprise over a period of time in a combined form and expressed in monetary value. 5 It contains the calculation of the balance sheet profit or loss figure of the enterprise, showing the main factors that affect the creation of the income and the components of the balance sheet profit or loss figure and how they are created. The income statement gives us information about the distribution of profit between the owners and the budget and also about how much of the profit is reinvested into the enterprise. Based on the income statement it is possible to assess the earnings position of the enterprise and the effectiveness of its economic activities. The supplement contains both numerical data and explanations and consists of two parts. One is general while the other is closely connected to the data found in the balance sheet and the income statement. It has to contain the information required by the Act on Accounting and all the data beyond what can be found in the balance sheet and the income statement that are necessary for the owners, investors and creditors to have a true and fair picture 4 Otto H. Jacobs Andreas Oestreicher 2000, p23, p30, p33 5 U.o. 170

5 VÉDELEM GAZDASÁGTAN of the financial status, liquidity and earnings position of the enterprise. The business report does not form part of the annual report but the preparation of one is mandatory according to the Act on Accounting. The aim of the business report is to give a realistic picture of the financial status, liquidity, earnings power and business continuity of the enterprise based on past transactions and perceived viability. 6 According to the Act on Accounting, the public disclosure of annual reports is mandatory. This allows the market players to have access to vital information about the economic activities of an enterprise. 2. The necessity of economic analysis Careful management and making the appropriate decisions are not possible without access to solid and accurate information. Economic analysis is one of the important means of the flow of information indispensible for business executives. Having adequate information is vital for executives at every level of business management so that they can demonstrate a high standard of economic leadership that meets the requirements. This information is provided by the results of economic analysis. All the knowledge an executive needs to be able to make the right decisions and to run a business effectively is called being well informed. As enterprises are expanding and managing them is becoming more and more complicated and complex, a well-organized system of supplying and processing data and information, and economic and technical analysis and evaluation based on them are gaining importance as a precondition for keeping well informed. The conclusions drawn from the analysis will determine the direction of activities and facilitate effective business administration. Only measures taken on the basis of the complex analysis of economic processes can yield the results that are consistent with the objectives. It is a basic requirement that the tasks and the means must be brought into harmony so that the enterprise should work effectively. These requirements can 6 Act C on Accounting of (1) 171

6 only be met by thoroughly examining all the significant processes of economic activity. 7 The tasks of the management are to make the decisions, to formulate and realize the objectives, to evaluate the results and reveal and eliminate the discrepancies. Economic analysis and the conclusions drawn from it determine the direction of activities and promote effective business administration, thus making it possible for executives to manage a business in the best possible way. In addition to the management, the external environment in which the business is working also affects the business administration of the enterprise. The effectiveness of the operation of the enterprise, it s earning power and, in general, the future economic viability of the business are in the centre of interest of external users. Naturally, the different players deem different information important, which are as follows: for the owners it is important to know whether their decision to invest was right, whether the financial status of the business is stable, and whether its ability to produce a profit and to pay dividends is satisfactory; for potential investors it investment decisions, the returns on their investment, the risks involved and the yield the investment will produce; the creditors want to get information about the safety of granting a credit to the business, its ability to pay current and long-term debts and interests; current and future partners (suppliers, buyers etc.) are interested to know how stable the relationship is; the environment in which the business operates is interested in information about the image of the business; for the purposes of macroeconomic assessments and analyses; for the is important to be able to think through their executives and employees of the enterprise stability, development and income security are important, although this group can get more information more frequently than provided by the accounting statement. 8 7 Dr. Birher Ilona Pucsek József Sándor Lászlóné dr. dr. Sztanó Imre, 2001, p13 8 Dr. Bíró Tibor dr. Pucsek József dr. Sztanó Imre, 2001, pp

7 VÉDELEM GAZDASÁGTAN Economic analysis, which is becoming more and more complex, gives answers and provides information to the questions of all these people and organisations. In the rest of the article I am going to describe the essence of the analysis of financial status, liquidity and earning power. 3. The analysis of financial status Assets are economic resources owned by a business or company and all the rights associated with them; they are an indispensible precondition for entrepreneurial activity. 9 The balance sheet records the monetary value of the financial status of a business and, on the one hand, it lists the different categories of the assets and on the other hand, it shows the financing resources for the assets. Assets are the concrete manifestations of the financial status of a business, while liabilities are the sources of cash from which the assets can be financed. When analysing the financial status, we look at the structure of the balance sheet of the business, the ratio between the different categories of assets and liabilities and the changes in them. The data needed for the analysis can be found in the current accounting period and the previous accounting period columns of the balance sheet. From the composition of assets it is possible to draw conclusions about the stability, the flexibility and even the actual activities of a business. The composition of liabilities shows the capital intensiveness and the viability of a business and also its dependence on liabilities. The analysis of assets involves describing the changes occurring in the assets as time goes by, revealing the causes of the changes and systemizing them. It also has to be examined how the origin of the assets matches their manifestations, in other words, whether the fixed assets have been financed from own or outside sources, and whether the current assets have been financed from short-term or long-term liabilities. 10 The analysis can be done using distribution ratios, which show the composition of assets and liabilities, or computing asset and capital structure indicators. 9 Reizingerné Ducsai Anita dr. Vörös Miklós, 2002, p15 10 Adorján Bába Lukács Mikáczó Róth, 2005, p

8 If, for instance, we examine the composition of the assets of a business, we will see the ratio of the various categories of assets, i.e. the ratio of current assets and fixed assets, and this is helped by the examination of distribution ratios. 4. The analysis of liquidity A good financial status does not automatically mean a good state of liquidity. Financial analysis is particularly important for the creditors, since past figures make it possible to estimate future financial performance. The liquidity of an enterprise is largely determined by its size, sphere of operation, market position, speed of realization, capacity utilization, development endeavours and earning power. The stability of its operations is also the guarantee of its cash balance, and on the other hand, growth is only possible in case of balanced cash management. The analysis reveals the enterprise s payment discipline, willingness to pay and solvency. In addition to obtaining information about and examining the structure of assets, it is also a very important task of the analysis to facilitate an unbroken cash flow and reveal the financial difficulties to be expected. 11 The analysis can be static, when the financial position is examined at a given point in time (using the liquidity statement and financial indicators) and dynamic, when development and change are also examined and in addition to the changes in assets and liabilities resulting from continuous operation, cash flow and the likely changes in cash flow are also considered (using the cash flow analysis and the statement of source and applications of funds). When calculating liquidity the financial assets at the disposal of the business and those that can be made available during its normal course of operation are compared with the current liabilities. Liquidity can be examined for the short term and for the long term. Liquidity is examined mainly with the help of liquidity indicators, which reflect the stability of an enterprise. They show how quickly a firm can turn assets into cash. As a result of the fact that the components of liquid assets cannot all be converted into cash during the same period of time, liquid- 11 Adorján Bába Lukács Mikáczó Róth, 2005, p

9 VÉDELEM GAZDASÁGTAN ity indicators have refined varieties. The composition of current assets over a given period in time is rather important, therefore current assets can be classified as committed, mobilizable and mobile assets. For example, an enterprise with a larger amount of working capital is more likely to be able to meet its short-term obligations, so it also affects its chances to qualify for bank loans. A high or increasing amount of working capital may indicate that the business has no liquidity problems, however, it may also be indicative of extreme caution, since the surplus in short-term assets could be invested and create extra profit. 5. The analysis of earning power According to the Law on Accounting, the business enterprise is required to show its earnings potential in the supplement and the business report. In order to analyze the earning power of entrepreneurial activity we need the figures in the balance sheet and the income statement. The earning power of the business is shown by the different categories of profit or loss. The analysis itself is primarily the comparison of the earning power indicators. When calculating earning power, the following categories of profit or loss can be considered: Operating (trading) profit; Ordinary profit or loss; Profit or loss before tax; Profit or loss after tax; Balance sheet profit or loss figure. The earning power indicators serve the purpose of measuring the cost efficiency and earnings potential of business activity. While earning power can only be expressed in monetary terms, when measuring economic efficiency and effectiveness, both natural and mixed units of measurement can be used. For investors the most important category of profit or loss is the profit or loss after tax, while for comparing earning power, profit or loss before tax should be taken into account. The profitability analysis forms part of the analysis of earning power and it provides evidence concerning the general performance of the company and its management. The indicators show how the enterprise is capable of producing a profit in its sales, using all its assets and the investments of its shareholders. 175

10 When computing the indicators of earning power, the figures of each year are always taken at the current price. Therefore, when assessing earning power, it is more important to evaluate tendencies than a static state. The earning power value for several consecutive years can give a picture of how the level of earning power changes in time, and also of the dynamics of development. Summary In the above article I tried to summarize the sources of information for economic analysis, as well as the essence of the analysis of financial status, liquidity and earning power. Consequently, if we take an investor s interest in a business enterprise, we need a great deal of information, which can be obtained from the above mentioned documents (annual report, business report) and their analysis, and the examination of the findings can give a realistic picture of the enterprise thus enabling us to make sound decisions. 176

11 VÉDELEM GAZDASÁGTAN Bibliography 1. Adorján Bába Lukács Mikáczó Róth (2005): Üzemgazdasági számvitel. Budapest, Saldo Rt. 2. Béhm Imre dr.(1998): Vállalkozások megítélése. Budapest, Perfekt Rt. 3. Birher Ilona dr. Pucsek József Sándor Lászlóné dr. dr. Sztanó Imre (2001): Vállalkozások tevékenységének gazdasági elemzése. Budapest, Perfekt Rt. 4. Bíró Tibor dr. Dr. Pucsek József dr. Sztanó Imre (2001): Vállalkozások tevékenységének komplex gazdasági elemzése. Budapest, Perfekt Rt. 5. Jacobs, Otto H. Oestreicher, Andreas (2000): Mérlegelemzése. Budapest, Kossuth Kiadó 6. Pap Andrea (2006): Az Office Depot Hungary Kft. éves beszámolóinak elemzése a közötti idıszakban (Szakdolgozat). Pécsi Tudományegyetem, Közgazdaságtudományi Kar 7. Reizingerné Ducsai Anita dr. Vörös Miklós (2002): Könyvviteli alapismeretek. Budapest, Perfekt Rt évi C. törvény a számvitelrıl 177

12 178