Financial Analysis: Methods, Techniques, and Importance

FINANCIAL ANALYSIS

INTRODUCTION
Financial analysis is characterised as a procedure of assessing financial information of
companies and evaluating each aspect by help of different techniques. In other words, this
can be defined as review of financial material to make strategic decisions. Usually this study
includes a summary of both past and expected productivity, cash flow, and risk. It can result
in the redistribution of personnel to or from an entity or a particular internal process
(Antonopoulos and Hall, 2018). This is crucial for corporations to do proper financial
analyse so that their stakeholders can aware from actual financial condition. This analysis is
useful for both to the internal and external stakeholders. As well as it also contributes in
analysing market trends, develop financial policies, construct long-term economic activity
strategies and classify projects or businesses. In order to do financial analysis of companies,
there are range of plans and methods that are applied by them. Eventually, without proper
financial analysis, this can be difficult for managers to take corrective actions (Tang and
Baker, 2016). It is so because if there will lack of financial information then this will be
difficult for managers to find a suitable framework to take appropriate actions.
The project report is based on different task which covers information about various
aspects. Basically, the report can be categorised into seven tasks in which first, second and
third task consists information about cash conversion cycle, methods to cash flow condition.
As well as in task four, five and six information about calculation of NPV, IRRetc. is done.
In the end of report, limitation of IRR technique is mentioned.
MAIN BODY
Task 1.
(a) What is cash conversion cycle (CCC)?
The term CCC can be defined as a type of matrix which is expressed in terms of time (Banerjee
and et.al., 2016). It calculates time period which is taken by a company in order to convert their
investments in stock and other sources in cash from sales. It is being calculated by including
different aspects such as inventory days, receivable days etc. Mainly it is computed by the
specific formula that is:
Days inventory outstanding + Days sales Outstanding – Days Payables outstanding

A smaller CCC is an indication of a period of better stock-to-sales. A smoother method is
suggested by a higher Cash conversion cycle. A low CCC is generally considered more
favourable, even if it focuses on the respective sector, market and abilities. Thus, it is stated that
CCC provide a valuable information which is helpful in comparing the performance of operation
and activities from the past performances.
(b) Analysis of three components of CCC?
It is based on three key components by which it is being calculated. Herein, underneath analysis
of these components is done in such manner:
 Days inventory outstanding: This is also known as days’ sales of inventory which is
being used by companies to find out days in which a company holds stock before selling
(Brusca, Gómez‐villegas and Montesinos, 2016). In order to calculate the value of DIO
specific formula is used such as:
DIO = (Average Inventory ÷ Cost of Goods Sold) x 365
Average Stock = (Opening stock + closing stock) ÷ 2
Cost of goods sold = Opening stock + Purchases –closing stock.
 Days sales outstanding: DSO is really the total number of hours between days the
receivable balances (the money owed to your business) are expected to be received.
Although cash-only transactions have a zero DSO, customers use company-extended
credit, so that this figure will be good. Thus in case of lower number of DSWO it is
consider to be more favourable. In context to determine the value of DSO specific
formula is used that is:
DSO = (Accounts Receivable ÷ Net Credit Sales) x 365
(Opening Receivables + closing Receivables) ÷ 2
 Days Payable Outstanding: DPO is really the total time frame a corporation takes to
produce its payables from its providers to the companies owes money and to make proper
compensate for them (Siminica, Motoi and Dumitru, 2017). If this could be greatly
increased, the business can keep on to money longer, increasing the investment value;
thus, it is easier to have a longer DPO. Formula for determining the DPO is:
DPO = Closing Accounts Payable ÷ (COGS ÷ 365)