Diagnosing the Financial Health of a Business
This four week course produced by Macquarie Graduate School of Management (MGSM) explores how financial reports can be analysed in fine detail to determine key performance indicators. Good financial analysis of The Balance Sheet, Income Statement and Statement of Cash Flows is about being able to tell a story. These records are a footprint left by management, and provide the information required to assess the current financial health of a business and to predict future performance.
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The Balance Sheet
All activity that a business engages in flows through its Balance Sheet in some manner. This module examines the Balance Sheet which reveals the assets, liabilities and equity of a business at a given point in time. Topics covered include:
- Why Start with the Balance Sheet?
- Current Assets
- Non-Current Assets
- Intangible Assets
- Goodwill
- Considerations With Assets
- Current Liabilities
- Non-Current Liabilities
- Equity
Income Statement
In order to determine success during a specific period of time, we review the Income Statement (Profit and Loss Statement) which provides a summary of revenues, costs and expenses. This module also explores the Statement of Comprehensive Income which recognises fluctuations in the net worth of a business which doesn't involve any direct income. Additionally, it clearly distinguishes between a cash basis of accounting and an accruals basis of accounting. Topics covered include:
- The Measurement of Profit
- Profits and Opinion
- Revenue Recognition
- Cost of Sales
- Levels of Profit
- Comprehensive Income
- Analysing an Income Statement
Statement of Cash Flows
The cash flow statement is an x-ray into a business. There are lots of examples of transactions that impact on performance but which may not involve cash. For this reason the three main categories of The Cash Flow Statement, Operations (CFOA), Investments (CFIA) and Financing (CFFA) require careful consideration. This module examines why reconciliation between cash flows and profits can be very helpful in understanding how a business is operating and why a large Funding Gap, lazy management of working capital, can cause more debt to be incurred. Topics covered include:
- The Cash Flow Statement
- Operating Cash Flow
- Cash Related to Investments
- Cash Related to Financing
- Telling a Cash Flow Story
- Free Cash Flow
- Operating Cash Cycle
Assessing Financial Performance
Information contained within financial reports can't be viewed in isolation when attempting to diagnose the financial health of a business. The size of the revenues, assets and profits need to be considered as a whole rather than in parts. This module examines various tools and techniques that can be utilised to assess risk, some related to financial risk and others related to business risk. Analysis explored include Ratio of debt over assets; Debt to equity; Interest cover; Access to debt; Asset utilisation and Provision for the future. Topics covered include:
- Knowing the Right Questions to Assess Performance
- Analysing Performance of Returns
- Analysing Performance of Risk
- Analysing Performance of Cash
- Should the Chief Executive get a Bonus?
- Working Capital Assessment
- Managing the Funding Gap
- Sustainable Growth Rates
- Risk Assessment
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