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ans Serif">Financial Analysis is concerned with the evaluation of the worth, progress and prospects of a business, and as one aspect of these, the detection of weaknesses.

ans Serif">A satisfactory analysis and interpretation is best carried out by assessing the results over at least three years. Trends in the business are significant. Whether such figures as sales and net profit are rising or not may be more significant than the actual sales figures and profit figures under review.

ans Serif">Analysis of the revenue accounts of an enterprise will give the best indication as to future prospects. If a business is operating profitably, weaknesses in the financial structure (as revealed in the Balance Sheet) may be overcome. However, a satisfactory financial structure can deteriorate quickly if losses are being incurred.

ans Serif">A comprehensive analysis and interpretation of accounts would include the following:

• ans Serif">Study the Gross Profit
• ans Serif">Examine Expenses
• ans Serif">Consider Net Profit
• ans Serif">Use Accounting Ratios

ans Serif">STUDY THE GROSS PROFIT
The amount of Gross Profit is the most important single factor in any business, as it must be large enough to cover the expenses and produce a profit.

ans Serif">Fluctuations in Gross Profit could be caused by:

• ans Serif">Mark-ups being taken which are too low
• ans Serif">Incorrect mark-ups being taken
• ans Serif">Excessive mark-downs caused by inefficient buying
• ans Serif">Failure to charge credit sales or get credits for returns
• ans Serif">Incorrect allocation of accounts e.g. capital expenditure allocated to purchases
• ans Serif">Failure to take advantage of discounts
• ans Serif">Theft of cash from cash sales
• ans Serif">Pilfering of stock
• ans Serif">Failure to keep an accurate record of the owner drawing goods for personal use
• ans Serif">A change in the sales mix, e.g. a greater proportion of goods with a lower mark-up being sold than in previous years

ans Serif">Once a pattern of trading has been established, the gross profit (as a percentage of sales) tends to remain steady. Any variation in the percentage should be investigated to ascertain the reason.

EXAMINE EXPENSES
The expenses of a business are predominantly fixed in nature i.e. they will not vary in accordance with variations in sales. Business will expand without incurring additional fixed expenses until a stage is reached when the increased volume of business forces increased expenses e.g. renting of additional or larger premises, increased wages due to increases staff.

ans Serif">Any variation in the dollar vale of expenses should be investigated to ascertain the reason.

ans Serif">CONSIDER NET PROFIT
The Net Profit is dependent on the foregoing factors and is an overall indicator of trading and managerial efficiency.

ans Serif">Net Profit (as a percentage of sales) should remain stable or show an upward trend. Any variation in the percentage should be investigated to ascertain the reason.