Correctly analyse and assess the company's financial situation

Solid financial key figures are essential and, together with market position, innovation performance and attractiveness for employees, are among the central parameters of every company. The instruments of financial corporate management include various key figures, a few of the most important of which will be briefly explained below. The basis for this is commercial bookkeeping and accounting. Depending on the legal form of the company, which requires an entry in the commercial register, as well as the type of business, anyone managing a company must comply with mandatory bookkeeping and accounting regulations. The Liechtenstein Persons and Companies Act (PGR), for example, regulates the accounting obligation for certain legal entities under Article 1045. In Switzerland, this obligation is listed under Article 957ff. of the Swiss Code of Obligations OR.

The key points of the annual financial statement analysis

In simplified terms, the key points are divided into four main elements: liquidity, stability, profitability and appropriation of results:

• ​Liquidity ensures solvency at all times.
• Stability stands for a financing structure that ensures that the owners of the company also have the say vis-à-vis outside partners. Complete stability is achieved when the company is 100% financed with equity capital (share capital/share capital) and retained earnings from previous periods (reserves/retained earnings).
• Profitability shows the extent to which it is possible to receive financial remuneration (return/profitability) for the financial input made. Profitability is understood as a ratio by means of which a profit figure is expressed as a percentage of assets/capital or turnover. However, profitability can also be understood as the generic term for all profit-oriented considerations. If a company wants to survive and be successful in the long term, it must be sufficiently profitable.
• ​The use of the result determines how the result is used, for example to maintain the company's substance and to secure its existence.

The crux of these four cornerstones of the annual financial statement analysis lies in the partially existing conflicts of objectives. For example, one can try to invest as much of the freely available funds as possible in a profitable way in order to increase profitability. However, this can lead to payment difficulties if urgent payments cannot be made on time because the money is invested and not available at short notice. One can also - by applying the so-called leverage effect - try to finance oneself with as much low-interest debt capital as possible in order to generate a higher return on equity. This in turn affects the financing structure (stability) because lenders are involved and may exert their influence. In the context of the appropriation of results, it must be considered which part of the money generated is to be left in the company in order to finance the future, and which part is to be distributed to the owners. These examples are intended to show that there are interdependencies and interactions between the various objectives and that it is therefore necessary to take an overall view in each case.

Realistic valuation without hidden reserves

Before an annual financial statement with balance sheet and income statement can be evaluated, it must be adjusted for any hidden reserves. Only with the "real" figures does it make sense to carry out the corresponding evaluations.

Key figures as decision variables

The evaluation of the mentioned key points not only serves the financial management of the company, but also as a basis for decision-making for possible lenders, namely banks, when it comes to assessing creditworthiness. Furthermore, the key figures are also of interest, for example, in the case of a purchase or sale or a merger of companies.

Liquidity

Liquidity is like oxygen for a company to breathe. If it is lacking even in the short term, current obligations such as supplier invoices and operating costs, but also the salaries of employees, can no longer be paid on time. Deadlines therefore play a major role in assessing a company's liquidity situation. In the short term, it must be ensured that the liquid funds (cash, postal and bank account) as well as the incoming payments expected in the short term are sufficient to meet the liabilities falling due in approximately the same period of time. If a company cannot raise additional funds in the absence of cash, it faces the threat of insolvency relatively quickly. In the medium to long term, there is also the question of whether the company will be able to make the investments necessary for its successful continuation. Securing the necessary liquidity is of utmost importance for every company.

When assessing the liquidity situation, the basic question is whether the matching maturities are maintained. For this purpose, it is asked whether the debts to be settled (short-term borrowed capital) are offset by sufficient liquid funds on the assets side as well as positions that lead to cash reflows in the same period. For this purpose, three ratios are usually formed that lead to liquidity ratios. A distinction is made between liquidity ratios I to III:

Liquidity ratio I

Liquidity ratio I (acid test or cash liquidity) compares cash and cash equivalents with current liabilities.

Liquidity ratio II

Liquidity ratio II (quick ratio) compares cash and cash equivalents and receivables with current liabilities. The minimum ratio required here is 100%.

Liquidity ratio III

Liquidity ratio III (current ratio) compares all current assets with current liabilities. The ideal ratio is at least 200%.

In the medium to long term, it must also be ensured that, in addition to current liabilities, any investments can also be paid.

Long-term success means, among other things, planning liquidity in such a way that the economic survival of the company is not only secured in the short term but also in the long term. Many entrepreneurs act intuitively and thus usually correctly, but it is nevertheless important to check liquidity at regular short intervals.