Authors: Inta Kotane, Irina Kuzmina-Merlino
Riga International School of Economics and Business Administration, Latvia
Using financial ratios and indicators to evaluate a company performance is a universal way over the world. However, which indicators help the investors to figure out the company’s situation the most effectively, especially for a small business? Inta Kotane and Irina Kuzmina-Merlino conducted a research about indicators and ratios in financial statements to apply for evaluation the company’s position.
As you know, it’s hard
for a small business to get loan from the credit bureau since its financial
resources which is contributed from an owner or partnership is limited.
Therefore, the purpose of this paper is to suggest building up a financial
indicator system which then is applied to evaluate small company’s financial
position in Latvia. Although the objective of this study aimed to small
business in Latvia, in my opinion, the feasibility of these study outcomes is
worth for small business over the world.
Coming up to the target
of the research, the authors looked into the necessary of financial indicators
and then prove their crucial roles in identify a company performance. Then they
applied their findings into the practical situation in Latvia. From that, they
generate a model of financial indicators system to measure how good the small
business is operating.
The methods used in
this research are: “logical analysis ad synthesis, content analysis and a
monographic method.” The data is collected from “Lursoft Ltd.” and “Latvia
Central Statistical Bureau”, the largest “information provider” in Latvia.
After the research,
some financial indicators, such as current ratio, net working capital to sales
ratio, debt to equity, financial cycle, sales margin, return to equity, and
maturing are identified as foundation for the model used for evaluating the
performance of the small business. More indicators to supplement to the system
depend on the features of the industry. The more indicators the system has, the
more accurately the performance of the company is judged. However, the system
must include those indicators above; and these indicators are required
correlated and correspondent to each other. In order to get the right
evaluation basing on the system, the examiners have to make sure that the
financial statement is prepared strictly according to the international
financial reporting standards (IFRS). Otherwise, at least the data in the
financial statement are proved to be objective. The level of accuracy from this
system prediction is counting on the precision of the financial statement as
well.
This research is
valuable for not only financial analyst but also investors and strategists. For
the strategists, ratios in a financial statement are effectively strategic
tools when they can translate the meaning information from the financial
statement in management. They are the supportive tools for analyzing the
operation of the small business since it can help to save time with reliable
results. The examniers need to focus on these main financial indicators which
are listed above initially as analyzing to have an overview of the operation.
Then relying on the size and specific features of each manufacture, they can
supplement other necessary financial indicators in their analysis.
Source: Inta Kotane, Irina Kuzmina-Merlino, Assessment of financial
indicators for evaluation of business performance, ISSN 1822–8402 European
Integration Studies. 2012. no. 6, http://dx.doi.org/10.5755/j01.eis.0.6.1554
GAAP is used in America while IFRS is used in most of European countries and some Asian countries. The differences between GAAP and IFRS is quite annoying for accounting practitioners, though the framework is basically the same. A good news is that the majority of the IASB is composed of US representatives. Hope the IASB may solve the discrepancies so as to make financial reports more comparable universally.
ReplyDeleteI know from the time I spent working at a small business, the two owners spent the better part of most of their time not generating new business or making new contacts, but having meeting after meeting with the bank. This bank was critical to the survival of this small telecommunications company with its ability to offer lines of credit. Additionally, since the company only have one accountant who was not a CPA the preparations of financial statements always took a long and concentrated effort.
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