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In their decision-making, managers, among other things, also use financial reports as instruments for monitoring the financial situation and financial operations in general.

Financial statements are used for internal purposes, but are also subject to study by external persons and institutions. They are used by shareholders, creditors of the company, tax and other state authorities and other institutions that deal with financial analysis. These reports contain significant data on the financial strength of the enterprise and its financial operations.


Company managers are primarily interested in the effects that financial operations will have on the state and prospects of the company in the future. Analysis of financial statements should help improve results in the future. The manager of the enterprise is usually interested in the general financial situation of the enterprise, its financial result, the development potentials, the possible financial effects of the decisions that are being implemented, the dividend policy, the financial possibilities for financing the future business expansion of the enterprise. etc.

Analyzing financial statements can greatly assist in the formulation of policy and the development of an organization's plan execution. With this analysis, deeper knowledge about the total environment of the enterprise is acquired, which enables an assessment of the long-term perspective and survival of the enterprise.

In the context of the analysis of the financial statements, it is important to have data from the financial statements of the competition, suppliers, and buyers. The results of the analysis of financial statements can be more useful if they are compared with their value in previous periods.

However, the analytical indicators should be seen only as trial instruments, not as conclusive solutions, and they should not be considered as a final, definitive assessment, but as a starting point in the assessment of the company's capabilities.

Basic financial statements

Enterprises prepare mainly the following types of financial statements:

•      balance sheet - shows the company's financial situation on a certain day, i.e. the account balances for assets, liabilities and own capital;

•      income statement - contains the income and expenses realized between two balance sheet dates, and the profit or loss realized in the operation;

•      accumulated profit balance - shows how the company's accumulated profit changed for a certain period of time by way of profit and dividends (accumulated profit at the beginning of the year + profit - dividends paid = accumulated profit at the end of the year);

•      cash flow overview - shows how cash was received and how it was used during a certain period of time (cash balance at the beginning of the period + cash inflow during the year - cash outflow during the year = balance of cash assets at the end of the period);

The analysis of financial statements is usually performed by several procedures:

•      horizontal analysis - can be presented in the form of analysis of reviews containing comparative data for certain periods of time. In this way, the horizontal analysis makes it possible to determine the differences for each balance position in order to see which position has changed and how much it has changed, and further examines how the change came about and whether that change is positive or negative.

•      vertical analysis - the vertical analysis procedure should show the relationships between the different balance sheet items in the financial statements. Each balance sheet position is expressed as a percentage based on a specific position in the same financial statement.

•      analysis using analytical indicators - analytical indicators are relationships between separate balance sheet items. They are obtained on the basis of horizontal, vertical and temporal comparisons of the positions of financial statements of enterprises and between enterprises, on the basis of comparison of data from financial statements and established standards, etc.

Types of analytical indicators

a) indicators of solvency (liquidity)

- current liquidity indicator - this is one of the basic indicators for measuring the financial power of the enterprise. Data on current assets and current liabilities of the company are needed to calculate this indicator. Meanwhile, current assets are those that, during normal operation, should be converted into money within a reasonable period, usually of one year. Current assets consist of: cash, market value of securities, receivables from buyers, inventories, prepaid expenses, etc. The difference between current assets and current liabilities gives the company's working capital.

Working capital = current assets - current liabilities

Example (from the data in table 1):

1,040,000 = 1,675,000 - 635,000

The importance of working capital is that the company must have a certain amount of this capital to be able to ensure timely payment of its obligations, possible expansion of operations or reserves for unforeseen and unwanted events.

The ratio between current assets and current liabilities gives the current indicator:

Current ratio = current assets / current liabilities


Current ratio = 1,675,000/635,000 = 2.64

A higher current ratio means greater certainty for the company's creditors regarding the promptness and full collection of their claims from the company. The literature states that a current ratio of 2:1 should be considered favorable. In practice, other criteria are also taken into account, for example, the type of activity, the volume of operations, the size of the company, etc.

b) efficiency indicators - these indicators are determined by dividing the amount of realization by some type of assets from the balance sheet. The most commonly used indicator from this group is the trade receivables turnover ratio. It shows how many times the company transferred its receivables from customers into cash during the year, which is a significant indicator of the quality of working capital and the financial performance of the company in general.

The larger amount of this indicator means more efficient collection.

Average receivables collection period:

It shows how many days it takes on average to collect accounts receivable from customers.

c) inventory turnover ratio

This indicator shows the efficiency in inventory management. If it is larger, it shows better inventory management, because with a lower amount of inventory, a greater volume of realization has been achieved.

d) Stock holding rate

This indicator shows the liquidity of stocks, that is, it shows how long it takes for one denar invested in stocks to be returned to cash. A higher value of this indicator means lower inventory liquidity.

e) profitability indicator - profitability is an indicator of the business success of the enterprise.

At its simplest, profitability can be expressed as the difference between the selling price and the cost price of the product. However, it is usually calculated if the relationship between the achieved financial result and the total means with which that result was achieved, which represents the coefficient of profitability.

f) productivity indicators - the productivity of the enterprise is expressed as the ratio of a certain type of output to a certain type of input. Output can be expressed in physical units or values, while input can be labor, materials, overheads, etc.

The company's management should use financial reports and analytical indicators as much as possible when making business decisions. However, this does not mean that all indicators must be calculated, but that an appropriate selection of the analytical indicators that will be used by the company at a certain moment must be made. The purpose of financial statement analysis is to illuminate key relationships between accounting figures in financial statements to gain insight into a company's operations. Managers should use these reports and indicators to assess the implications of their decisions regarding financial condition and operations.


Veysel Saraç