11.08.2022

Economic and financial analysis in 5 steps

Economic and financial analysis is a universal tool that allows estimating the profitability of investments. It can be used to assess the feasibility and profitability of a business project by any manufacturing entity. For simplicity, a group of companies engaged in the manufacture of physical products can be considered, but the analytical model (including all its component stages) is a universal tool.

In order to begin the analysis, it is necessary to precisely determine the purpose of a given project, in this case to characterize the product that is planned to be produced. It is also necessary to provide at all stages of the study the financial and economic data, such as, for example, the structure of costs and revenues or the values of market indicators, necessary to achieve reliable results.

Step 1: Analyze the legal situation

The start of a proper economic and financial analysis should be preceded by an analysis of the applicable legal acts. The verification should include documents that affect the sector in which the planned investment is to be carried out. Emphasis should be placed primarily on verifying the existence of restrictions on a given product and bans on its production, distribution or sale in a given market.

Stage 2: Assessing the state of the enterprise

The second step of the analysis is to assess the state of the business entity, primarily from the financial side. It allows you to check whether at a given moment the company can afford to carry out the intended project.

The feasibility of the project should also be verified at this stage. This is based mainly on financial capacity, but additional elements should also be taken into account, depending on the nature of the production of the new product and its impact on the entity's existing operations, such as production and personnel capacity.

Step 3 Analysis of investment potential

The potential analysis consists of examining the size of the economic area in which the investment is planned, assessing the competition and identifying barriers in the market.

Once the market and competition have been analyzed, the potential of an industry can be preliminarily estimated in terms of conducting production or sales activities there.

Step 4 - Analysis of the profitability of the investment

The next stage includes an analysis of costs and revenues related solely to the production, distribution or sale of the product selected at the outset. This part, which is a financial analysis, also takes into account capital changes in the remaining business resulting from the expansion or change of the product portfolio. It is important to identify all cost and revenue groups. This is because it allows a reliable forecast of the financial result from the planned investment.

The fourth stage allows for a final assessment of the profitability of a given business. It also shows the distribution of point profitability over successive years, which allows you to choose the year to start a particular type of business.

Step 5 Deciding on implementation

As with other types of analysis, the economic-financial analysis should also conclude with a conclusion and, ultimately, a decision on whether or not to begin production, sales or distribution of the new product.

Marcel Prentkowski

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