Question

Think about a service company and the types of transactions we will be posting for this type of company, what are the most important elements of a service company from an analytical perspective? If you were to analyze the financial statements, where would you focus your attention and why?

Answer 1

The most important elements of a service company , that it must get right are (a) the funding mechanism ; (b) Employee management system ; and (c) Customer management system.

Now, analyzing financial statements require extra little care in case of service companies. The areas to be focussed are as follows:

Firstly, the quality of the financial statements should be assessed. The main questiom should be whether the balance sheet is a complete representation of the firm's economic position. Then current profitability and risk should be analyzed. The most common tools could be financial statements rstios relating to liquidity, asset management, profitability, debt management etc. Forecasted financial statements should also be prepared. Financial professionals must take reasonable assumptions about the future of the firm and determine how these assumptions will impact the flows.

This was analysis but once the analysis are completed, there are some more questions that must be answered like can the numbers provided be trusted or not. There can be manipulations and it is important for the financial professional to understand how these manipulations are perpetrated and more importantly, how to detect them.