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Financial Analyses
Abstract
Financial analyses provide an account of an enterprise's past performance, a picture of its current financial strength/weakness, and a glimpse into the future financial potential. The owner of a farm firm periodically assesses and analyses the performance of the enterprise against predetermined objectives. The analysis is undertaken with the use of some tools. Because the discerning farmer needs to keep objectives of the enterprise in constant view, this chapter focuses on financial analyses with a view to highlighting the tools used in assessing a farm firm performance against predetermined objectives. The discussions are based on a review of relevant literature. The objectives of this chapter include defining the concept of financial analyses, describing the tools for analyses and showing worked examples of financial analysis, and highlighting the concept of rate of return. Financial analyses can be undertaken by management of an enterprise or by parties outside the enterprise. The three commonly used tools of financial analyses, namely the balance sheet, the income statement, and the cash flow statement, tend to be associated with some flaws, especially with regard to the reliability and validity of the accompanying figures. As a result, results from financial analyses should be interpreted with caution. It is further recommended that financial analyses be matched with a more observable measure of the financial health of a farm enterprise in terms of physical growth and expansion, credit worthiness, and how the enterprise meets its maturing obligations.
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