3Financial Analysis Questions
Thecomparative analysis involves the comparison of items in a financialstatement for two or more periods. For instance, gross profit for oneperiod can be compared with another for a different date. One of thechief objectives of comparative analysis is to understand the trendof a financial item for a specified time (Sherman & ebrary, Inc.,2011). Also, another goal of the comparative analysis is tounderstand the performance of an organization in terms of financialstatement components for instance, the performance of a company interms of revenue for two distinct periods. When the items for two ormore periods are compared, it is feasible to understand whether anorganization has made positive or negative changes within the periodunder consideration. Comparative analysis is important to theexternal users of the financial statements such as loan officers andinvestors since it helps in indicating the trend of an entity fromone period to another (Sherman & ebrary, Inc., 2011). This beingthe case, the external users are in a position to make the bestdecision based on what they desire to engage in. For example, withthe comparative analysis, the lenders can be in a position to makethe decision of whether to offer credit or not on the ground of thefinancial trend.
Thecurrent ratio of an organization is exceedingly substantial since ithelps in measuring the capacity of the entity to pay its short-termobligations (Sherman & ebrary, Inc., 2011). Since this ratio iscalculated using the current assets and liabilities, the assets inthe short-term must be higher than the liabilities for the sameperiod in order to show the ability of a company to facilitate itscredit using its assets. However, in the case of the entity underconsideration, the bank indicated that the current ratio of 2 to 1was not adequate. Although this is an exceedingly high ratio, thebank stated that it was not sufficient because it could imply thatthe organization is not effectively using its short-term financingfacilities. In case the company does not make good use of theavailable short-term credit facilities, the resultant current ratiowill be very high as in the scenario of 2:1. Another reason why thecurrent ratio of the company may be too high may emanate from itsinefficient utilization of its current assets. In such a situation,the entity may not be utilizing its assets resulting in lack of wearand tear implying that the assets values may not highly decline.
Sincea start-up may have the problem of showing the performance history,it is possible to look for other information that can assist astart-up in obtaining a loan. One way that start-ups can use ineliminating the hurdle entails presenting their business proposal tothe loan officers. Every start-up has a blueprint of what it desiresto do and the steps that it is going to use in accomplishing itsgoals through a formal proposal. The proposal can be used by loanofficers to establish whether the objectives of the business arerealistic. The feasibility of the objectives can help a start-up inobtaining a loan. Furthermore, the hurdle can be resolved through theloan officers using the credit ratings of the individuals who desireto be involved as business partners in a start-up. The credit ratingcan help to understand if the individuals are creditworthy.
Sherman,E. H., & ebrary, Inc. (2011). Financeand Accounting for NonFinancial Managers.S.l.: AMACOM Books.