Chapter 14. Financial Analysis of Operational Topics

The majority of this book is concerned with determining the overall financial strength or weakness of a company. However, that type of review does not yield a sufficient degree of information regarding why certain financial results have been achieved. The reason is that the performance of individual departments within a company have a great impact on overall results. For example, the failure of the engineering department to charge customers for changes to their product designs can have a serious impact on profitability, while the failure of the logistics department to keep inventory turnover levels to minimum levels can cause a company to run out of cash. A good job of financial analysis, then, must include not only the overall financial results of a company, but also a detailed review of those individual departments that are causing the overall problem. This chapter describes the key areas in which each of the most common departments can affect a company’s financial performance, as well as how to calculate those measurements.

Analysis of Accounting and Finance

The accounting department, strangely enough, is not as heavily analyzed as other departments, perhaps because the staff doing most corporate review work is based in this department and does not want to measure its own performance. Although many accounting and finance activities are concerned with nothing more than the daily processing of standardized transactions, there are ...

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