Financial assessment: how and why?

What is a financial assessment?

By definition, financial analysis is a dynamic analytical tool designed to provide a comprehensive overview of a company’s performance.

With a view to identifying the company’s strengths and weaknesses, the financial assessment takes into account, in particular:

• its financial data;
• its current operational performance;
• its prospects for development.

The financial analysis thus provides an up-to-date snapshot, enabling an analysis of the company’s future prospects.

Why carry out a financial assessment?

By analysing available resources, operational results and investments made, the financial assessment sheds light on:

• the company’s performance;
• the company’s growth rate;
• the company’s liquidity;
• the company’s creditworthiness;
• the risks faced by the company.

Profitability and solvency

An analysis of the balance sheet and a review of the profit and loss account show, respectively, where the resources come from (and how they are used) and what financial performance results from the resources deployed.

Risks and loss of earnings

The financial analysis also identifies areas for improvement within the company; these may relate to both production and cash flow management (supplier payments, customer invoicing, stock management, etc.).

Growth prospects

Finally, the financial analysis highlights potential opportunities and risks for the business, enabling it to find the right solutions. Whether it’s securing resources or, conversely, launching a new investment plan, decision-making becomes easier.

Financial assessment: when and for whom?

The information provided by the financial assessment is a major asset in many situations. 

In addition to CFOs and company directors, this tool may be of interest to a number of other stakeholders:

• employees and staff feel more involved in the company’s development;
• shareholders are reassured about the profitability and long-term viability of their investment;
• Lenders such as banks are also reassured by gaining an insight into the borrower’s growth prospects.

A financial assessment is therefore a negotiation tool that should not be overlooked!

It can be carried out:

• when the company is experiencing (or anticipates) financial difficulties;
• as a precaution during a routine check-up;
• at the time of the company’s acquisition;
• in the event of administration or liquidation.

Please note: Although normally optional, a financial assessment is mandatory in the event of administration or liquidation.

How do you carry out a financial assessment?

The data analysed

Not only is financial analysis a dynamic tool over time, but it also provides an internal and external analysis of the business, covering both its production processes and structure as well as its competitive environment.

To provide relevant information, financial analysis is based on:

• The balance sheet. Adjustments are made to the balance sheet to produce a functional balance sheet that shows uses (fixed assets, current assets, cash and cash equivalents) and sources (fixed liabilities, current liabilities, cash and cash equivalents).

• The income statement. As it sets out the balance between resources deployed and financial performance during the current financial year, it provides an overview of the company’s growth, margins and break-even point.

• Supporting documents are also used as appropriate.

The functional balance sheet is a restatement of the accounting balance sheet by cycle:

• the operating cycle;
• the non-operational cycle;
• the cash flow cycle;
• the sustainable cycle.

Whether carried out on its own or as part of a broader assessment, a financial analysis presents a number of financial ratios to provide an accurate picture of the company’s financial health.

These ratios can be divided into several categories:

• profitability ratios;
• solvency ratios;
• liquidity ratios;
• cash flow ratios;
• coverage ratios;
• structural ratios;
• …

Good to know: The key ratios to focus on may depend on the company’s sector of activity.

The steps involved in carrying out a financial assessment

A financial assessment consists of two main parts:

• an analysis of the company’s economic and sectoral environment;
• a detailed analysis of the company’s accounting policies.

The analysis of accounting principles measures the company’s economic profitability and the financial return on the funds invested in it. Following this, the trends in the main expenditure items are examined.

Finally, the financial assessment is accompanied by practical recommendations to assist with decisions regarding future investments and savings options.

Whether it is to expand the business, to protect against potential crises, or to negotiate with a lender, a financial assessment offers numerous benefits that are almost impossible to do without.