Unit 2
HO 2-5 (continued)
the evaluation process. These
statements rely on historical data
and thus, are pictures of past
behavior. One must presume
that
past behavior is a reasonable
predictor of present capacity
and
future expectations. To some
extent, such assumptions are
reasonable. However,
for smaller businesses, these
figures may not
capture the
firm's vitality or future prospects.
For example, the
business
may have endured some
extremely lean years, but be
poised to capitalize
on new market opportunities.
The financial
statements may be quite weak
and quesionable, but the business quite
progressive and healthy. Therefore,
one must always
remember that financial analysis
is only one of many tools
employed to determine the
state of the business' internal
condition. Financial analysis
is only as powerful as the
extent and
quality of the information
on which it is based. If the
firm has
neglected gathering meaningful
data or has prepared scant and
limited statements, it becomes
much more difficult to
draw
wor:hwhile objective financial
conclusions. In these cases, the
statements
are supplemented with
personal opinion !nd interpretation. Although poss;bly
misleading, such interpretations
may produce
more logical conclusions
than relying only on
limited
numerical data
Many businesses find it useful
to compare their financial
picture against some general
standard. They desire to know
how they stack-up against
industry performance norms.
Such
comparisons can
be useful barometers or check
points for the
business, but must be approached
with some degree of caution.
Financial ratios,
for example, may be significantly
higher or
lower
than comparative standards
yet be perfectly plausible and
reasonably explained.
Although
comparative information may
come from a number of sources, here
are two popular, primary
sources. Dun
and Bradstreet publishes
Industry Norms and Key Business
Ratios,
containing balance
sheets, income statements, and
selected ratios that can be used
to relate the business to the
typical or
average
firm secured from Dun and Bradstreet's
extensive database. Trade associations and
trade magazines regularly
provide
useful comparative statistics,
often more specific to and
relevant for the
small business.
Chapter Two Internal
Analysis 61204