Financial Statements and Tools for A Project

Happy Learning!!

For analysis and appraisal of a project idea, a number of financial statements and projections are made.The financial statement and tools required for project financing are;

1) The Balance Sheet: This is a statement of balances, depicting the state of affairs or position of a business enterprise at a particular date. It is prepared as per the accounting standards of the country.

• The management of the business should ensure that the assets are used to generate profits.
•  Moreover, the balance sheet is analysed to test whether the funds provided by the manager/owner/shareholder/lender have been invested judiciously to create assets. 
• The assets so created should be able to generate the highest operating and investment returns. 
• The net income thus earned should be able to make the business self sustaining and leave a surplus for the future growth of the business entity.

2) The Profit and Loss Statement: This is an operating statement which summarizes the transactions which together result in profit or loss during a specific period of time. The method of analysis for decision making include the

• Percent of Sales Method: The individual cost components are expressed as percentage of net sales during the year and other years covering the period of analysis.
• Incremental Sales Method: An analyst derives the extent of contribution made by important expense items towards overall costs or profitability.
• Time Series Analysis: Using historical data, this analysis captures the behavior of a financial parameter sales, total expense and so on over a period of time and is useful to predict future trends.

3) Funds Flow Statement: This statement captures the movement of funds between one balance sheet and another. It enables the monitoring the end use of funds.
 Sources of Funds include:

• Increase in liabilities
• Decrease in assets
• Profit accruals

Uses of funds include

• Decrease in liabilities
• Increase in assets
• Funding of losses
• Payments like dividend and taxes

A funds flow statement is analysed to find out exceptions about whether short term funds are being diverted to funding long term expenses, whether there is a disproportionate increase in various types of inventories, whether funds generated out of business operations are increasing or decreasing and also to compare the actual statement with the projected statement and to find out the reasons for the difference.

4) Cash Flow Statement: Cash flow has a smaller connotation than 'funds'. Cash flow statement includes items that affect the cash position of a concern.
The sources and uses of cash include

• Cash generated and absorbed from Operations
• Cash from Investments include sale of fixed assets and uses include purchase of fixed assets
• Cash from financing include Equity Issues and uses include payment of dividend and transactions in debt

The analysis of the cash flow statement include whether any drastic changes have occurred in the past trends and projections of liquidity position, whether there is too little or too much cash and  how the unit will handle the seasonality.Readers may visit the post about 'Funds flow and Cash flow' to know more about the topic at http://ecoformanagers.blogspot.in/2014/04/funds-flow-and-cash-flow.html

5) Ratio Analysis: Ratios are the accounting measures of risks,profitability, liquidity, repayment capacity operating and financial efficiency. ratios are generally divided into the following categories:

• Operating and Financial Ratios
• Turnover Ratios
• Leverage Ratios
• Profitability Ratios

Readers may visit the post about 'Ratios of Financial Statements' for further explanations about Ratio Analysis at http://ecoformanagers.blogspot.in/2014/04/ratio-analysis-of-financial-statements.html