Financial Planning & Analysis and Performance Management

2FUNDAMENTALS OF FINANCE

CHAPTER INTRODUCTION

The traditional and most fundamental aspect of financial planning and analysis is the ability to understand and evaluate financial statements and financial performance. This chapter presents a brief introduction (or refresher) to financial statements and financial ratios. Many finance professionals will use these financial ratios as overall measures of a company's performance or as overall measures of performance on a particular driver of value.

BASICS OF ACCOUNTING AND FINANCIAL STATEMENTS

The three primary financial statements are the Income Statement, the Balance Sheet, and the Statement of Cash Flows. We need all three statements to properly understand and evaluate financial performance. However, the financial statements provide only limited insight into a company's performance and must be combined with key financial ratios and ultimately an understanding of the company's market, competitive position, and strategy, before evaluating a company's current performance and value. A significant limitation of financial statements is that they present historical results – that is, the past. Other measures and mechanisms must be utilized to see what is happening in the present and to predict and manage future outcomes.

Financial statements are based on generally accepted accounting principles (GAAP). A key objective of financial statements prepared under GAAP is to match revenues and expenses. Two significant conventions arise ...