how to conduct a financial impact analysis

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How to Conduct a Financial Impact Analysis from businessbankingcoach.com in association with

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It's often easier, when talking to clients, to talk in money rather than ratios or profit percentages. This presentation shows you how to convert the differential in ratios or margins between two sets of financial statements into monetary values.

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Page 1: How to conduct a financial impact analysis

How to Conduct a Financial Impact Analysis

from businessbankingcoach.com

in association with

Page 2: How to conduct a financial impact analysis

A financial impact

analysis is a methodology

by which you can convert a

differential in a margin or a

ratio to a monetary value.

Page 3: How to conduct a financial impact analysis

It’s useful when talking to

clients about perceived

concerns that you might

have in the financial

performance or the financial

structure of the business.

Page 4: How to conduct a financial impact analysis

So the process begins with a normal ratio

analysis during the course of which you notice a

deteriorating trend in a ratio or a margin

(percentage) and you want to discuss this

variation with the client’s owners, managers or

directors.

Page 5: How to conduct a financial impact analysis

Depending on the level of

financial sophistication that

the owners /managers /

directors have, it’s often

easier to talk in money

terms than in ratios or

percentages.

Page 6: How to conduct a financial impact analysis

Depending on the level of

financial sophistication that

the owners /managers /

directors have, it’s often

easier to talk in money

terms than in ratios or

percentages.

Also, doing that has the

advantage of showing the

actual scale of the variation

as an amount of money.

Page 7: How to conduct a financial impact analysis

Let’s use an example to

illustrate;

Page 8: How to conduct a financial impact analysis

Let’s use an example to

illustrate;

Say that you analysed the

financial statements of a

company and found that the

gross profit margin had

reduced from 56% to 50%

on a turnover of 10 million.

Page 9: How to conduct a financial impact analysis

You decide to bring this to the

attention of the company’s

directors but when you do, the

managing director says;

“it’s only 6%.....

……nothing to worry about”

Page 10: How to conduct a financial impact analysis

By conducting a financial

impact analysis you can

convert that 6% differential

into a real monetary value to

help make your point.

Page 11: How to conduct a financial impact analysis

By conducting a financial

impact analysis you can

convert that 6% differential

into a real monetary value to

help make your point.

Here’s what you do……

Page 12: How to conduct a financial impact analysis

You calculate the gross profit that the

company actually made;

10m (revenue) x 50% (gross profit margin)

= 5m in gross profit

Page 13: How to conduct a financial impact analysis

Then you calculate the gross profit that the

company could have made if the gross

profit margin had remained at 56% (that’s

called the target gross profit margin);

10m (revenue) x 56% (target gross profit

margin)

= 5,6m gross profit

Page 14: How to conduct a financial impact analysis

So the difference between

the two gross profit figures

of 600,000 is the financial

impact of the company

achieving a 50% gross

profit margin instead of the

previous 56% on the same

level of revenue.

Page 15: How to conduct a financial impact analysis

When the managing

director realises that the

drop in the gross profit

margin actually caused

them a drop in profit of

600,000, she might feel it

is something to worry

about!

Page 16: How to conduct a financial impact analysis

It could be a past ratio or margin from a time

when the company performed well or it could be

an industry benchmark or even a ratio or margin

required in terms of a covenant in a facility letter.

You can use any

ratio or margin

(percentage) for

the target.