Communications Memo - Essay Example

VENTURA HOLDINGS MEMORANDUM R.J. Falk 09 April J. Smith BASIS FOR COMPARISON IN ANALYSISNG VENTURA FINANCIAL MENTS AND FACTORS OF AFFECTING QUALITY EARNINGS Our efforts to establish the degree of performance of the organisation mainly depend on analyzing information obtained from the financial statements. In a bid to improve the viability of the organisation, it is important for the management to have a basic overview of the bases of analyzing the company’s financial statements. I am convinced that we need to take a holistic approach in analyzing the company’s financial statements in order to be better positioned to make informed decisions to ensure that the company gains a competitive advantage and remains viable in the long run.

Basis for comparison of financial statements The main purpose for analyzing financial statements by the managers is to fulfill mainly three goals which include the following: to control the operations of the organisation, to assess the level of stability of the partners as well as to assess the way the company is viewed by the creditors as well as debtors. Essentially, the purpose of doing business is to achieve profit goals for the organisation. In order to establish if the organisation is achieving its goals, there is need to constantly analyse the financial statements.

The company also analyse financial statements to establish the quality of relationships with the business partners as well as to get an insight into how the company is viewed by the creditors and debtors. Horizontal and vertical analyses are used to analyse the company’s balance sheet. The horizontal analysis is mainly used to establish the value of the assets and changes in the financial statement over a period of time. On the other hand, vertical analysis of the financial statement is used to compare the total assets in the balance sheet and revenue generated.

The base for horizontal as well as vertical analysis of the balance sheet is the total current assets of the organisation. Income statements are also analysed to establish if the company is making profits or losses so as to be able to make informed decisions about turning around the fortunes of the company. A percentage change to the company’s total assets or net earnings can be established in both horizontal and vertical analysis of the financial statements. On the other hand, cash flows are analysed to establish the extent to which the company is operating a horizontal and vertical analysis can be used to establish any changes in the cash flow patterns.

Limitations to comparative analysis The main limitation of comparison of analysis of financial statements is that it must not be limited to numbers only. There are various other factors that affect the financial performance of the organisation hence the need to get as much information from other sources such as newspapers to get insight into the true position of the company in relation to its core business. Basing the financial analysis on figures such as changes in profit margins, total assets as well as cash flows may not be a true reflection of the company’s financial performance since there are other factors that also need to be considered.

The management should seriously consider the propositions made by the accounting department so as to ensure that the company complies with the set organisational goals. Factors that affect the company’s quality of earnings Operational costs mainly affect the quality of the company’s earnings. If bold measures to minimize the operational costs particularly in labour are taken while maintaining the core business values, there will be high chances of improved earnings by the company. If the wage bills increase, there will be a decline in the profit margins earned by the company.

On the other hand, if quality is improved while operational costs are maintained, there will be an increase in the net earnings by the company. It is my strong conviction that if the company is guided by the results of the periodical financial statements, it will be able to operate viably. Essentially, our main goal is to maintain the expected quality standards while achieving our aim to be profitable. Thus, compromising on quality will be disastrous to the operations of the company as a whole. J. Smith (Accounting manager)