The Impact of Financial Analysis on Managerial Oversight
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THE ROLE OF FINANCIAL ANALYSIS IN MANAGEMENT CONTROL
| PAGES = 67 | CHAPTERS = 1 – 5 |
CHAPTER ONE
INTRODUCTION
- BACKGROUND OF THE STUDY
Financial analysis is a comprehensive process that involves the meticulous examination and evaluation of a company’s financial statements to make well-informed economic decisions. These financial statements typically include the income statement, consolidated statement of financial position, statement of cash flows, and the statement of profit or loss and other comprehensive income. The goal of financial statement analysis is to employ a range of specific techniques designed to assess various aspects such as risks, performance, financial health, and future prospects of an organization.
This process is crucial for a diverse group of stakeholders, each with distinct interests and objectives. For instance, credit and equity investors utilize financial analysis to gauge the profitability and stability of their investments. Government agencies may use it to assess compliance with regulations and fiscal health. The general public might rely on it for transparency and accountability, while internal decision-makers within the organization use it to guide strategic planning and operational improvements. Each stakeholder group applies different analytical techniques to address their unique needs and concerns, making financial analysis a versatile and essential tool in the decision-making process.
Financial analysis encompasses a thorough evaluation of the financial challenges that a company may face and the determination of the most appropriate strategies to address these issues. To make effective financial decisions, it is crucial to identify potential financial problems and thoroughly analyze the consequences of different alternative actions. The approach to financial analysis varies depending on the perceived needs of the company and the specific types of decisions that its management must make.
Companies’ needs can differ significantly, but financial analysis commonly focuses on several key areas. These include long-term financial planning, which involves strategizing for future financial stability and growth; profit planning, which aims to forecast and optimize profitability; budgeting, which is essential for allocating resources effectively; capital investment decisions, which are critical for funding projects and expansions; operational auditing, which ensures that financial and operational processes are efficient and compliant; mergers and acquisitions, which require careful financial evaluation to ensure successful integration; and the management of temporary corporate investments, which involves optimizing short-term financial assets. Each of these areas requires detailed analysis to support informed decision-making and enhance overall financial performance.
The primary goal of financial analysis is to enhance the owner’s wealth by boosting the market value of their investment in the company. To achieve this, financial analysis is employed to increase the value of the company’s equity and to optimize overall financial performance. Financial analysts play a crucial role in this process by engaging in various activities that drive improvements and ensure sensitivity to changes.
Analysts are responsible for a range of ongoing tasks, such as assessing the company’s liquidity, conducting operational audits, and overseeing daily financial operations. Additionally, they have periodic responsibilities, which may be annual or semiannual, including performing sales analyses, evaluating the company’s debt structure, preparing financial statements, and conducting ratio analyses. They also analyze the investment of liquid reserves to ensure optimal financial management. Each of these activities is aimed at strengthening the company’s financial position and ultimately increasing the owner’s wealth.
Under the Company and Allied Matters Act of 1990, companies are legally required to present a comprehensive set of accounts within their financial statements. These statements serve a critical purpose: they help users assess a company’s future prospects, profitability, and financial standing. For investors and creditors looking to allocate their limited resources wisely, examining these financial statements is essential.
The assets and financial data are prepared in accordance with a standardized framework known as Generally Accepted Accounting Principles (GAAP). This adherence to GAAP ensures consistency and reliability in financial reporting. By analyzing these statements, users gain valuable insights into a company’s financial strengths and weaknesses, enabling more informed investment and credit decisions.
First Bank of Nigeria PLC (First Bank) was established in 1894 by Sir Alfred Jones, a prominent shipping magnate from Liverpool. The bank began as a modest operation within the offices of Elder Dempster and Company in Lagos.
Initially, the bank was incorporated as a Limited Liability Company on March 31, 1894, under the name Bank of British West Africa (BBWA), with its headquarters located in Liverpool. As the economic and business landscape evolved, the bank underwent several restructurings. In 1955, it rebranded from Bank of British West Africa (BBWA) to Bank of West Africa (BWA). The name changed again in 1966 after a merger with Standard Bank, UK, becoming Standard Bank of West Africa Limited. By 1969, the bank had transitioned to Standard Bank of Nigeria Limited in accordance with the Companies Decree of 1968. Subsequent rebrandings included a change to First Bank Nigeria Limited in 1979, and finally to First Bank of Nigeria PLC in 1991.
The bank expanded its presence internationally with the opening of a branch in Accra (then Gold Coast, now Ghana) in 1896 and another in Freetown, Sierra Leone, in 1898. In Nigeria, First Bank of Nigeria PLC opened its second branch in Calabar in 1912, followed by a branch in Zaria in northern Nigeria in 1924. The Kano branch was established in 1928, and today, First Bank boasts over 570 branches across various locations.
First Bank of Nigeria PLC is led by Mr. Stephen Olabisi Onsanya, who serves as the Managing Director and Chief Executive Officer. The bank’s Board of Directors comprises a blend of expertise and leadership, with seven executive directors and eleven non-executive directors. Each member brings a wealth of high-level competence and a proven track record of success in their respective fields.
STATEMENT OF THE PROBLEM
Some firms do not see robust financial analysis as a valuable tool for management control. However, many experts argue that financial analysts significantly enhance liquidity and productivity management, thereby contributing to effective management control through informed decision-making. It’s important to note that the information available to external parties is often restricted to what is presented in annual reports and accounts, which can be complex and challenging to interpret.
Several challenges arise during financial analysis, including fluctuations in asset figures, variations in accounting policies between periods, changes from purchasing to leasing equipment, the identification of costs and expenses, and the interpretation of financial ratios. Additionally, shifts in government incentive packages can complicate analysis. This project seeks to investigate whether financial analysis effectively supports management control by utilizing financial ratios.
Thus, the study aims to evaluate the empirical relationship between financial analysis and management control, focusing specifically on aspects of liquidity and profitability.