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Understanding and interpreting the financial information concerning the company and its operations is the most important aspect of good corporate management, demonstrating the management capacity to understand causes and effects of the production process on financial performance.

Economic and financial analyses both use accountancy terms that may not be familiar to you. A very short glossary of terms can be accessed online to help newcomers or those wishing to improve their understanding. In addition, terms are highlighted and when clicked, will show a brief definition.

When looking at the financial performance of a company or a project, confusion can arise in understanding the terms and meanings of the components referred to. This is further complicated by the slight differences that exist between economic analysis and financial analysis. While economic analysis tends to include wider parameters and long term goals, financial analysis focuses on the past, current and short-term financial performance of the company/project.

The aim of every company is to generate a profit for its shareholders, providing a financial return for their investment in the business. The annual performance of the company is reported officially in the Profit & Loss Account and the Balance Sheets. Profits or losses are the simplest measures of the financial performance of the company, reflecting the difference between expenditure on inputs (such as labour, materials and services) and income obtained from outputs (product sales). For aquaculture, one of the best operating relationships for estimating performance is that of productivity which itself can be measured in a variety of ways.

Production per person employed, production for money invested, production per growing unit (tanks/ponds) are all valid measures of productivity and they allow focus on the actions and decisions of the company managers during the year. They also permit the identification of the optimum relationship between inputs and outputs that is needed to obtain the profitability desired.

Sound financial information is the base for optimum decision making and has to accurately reflect all operating, technical and marketing issues. While the companyís annual accounts are usually a retrospective analysis of the financial picture, it is necessary to understand some simple economic principles that ease both understanding and forecasting.

To ask questions for the financial review, you must be able to understand how a financial analysis is carried out.

The basis of any financial review of business performance looks at 4 separate sections that are essential for good analysis and planning, namely:

The Profit & Loss Account - a reflection of the annual financial returns of the company
The Balance Sheets - a review of the financial structure of the company and the risks
The Working Capital - needs an estimate of for what and when short-term cash is needed
The Cash Flow Forecast - a calculation of cash and financial positions, needs and availability

There are several different aspects concerning the itemised elements of the Profit & Loss Account that need to be clear. Profits/Losses are calculated from the annual performance of the company and their source is mainly calculated from the financial difference between what has been bought/used for the activity of the company and the value of what has been sold. Nonetheless, additional items reflecting corporate activity are also included in this Statement.

The realisation in the accounting year of the value of assets belonging to the company have to be included as income for that year.

Interest paid to the company (e.g. on company loans or investments) or by the company (on loans taken or on overdraft facilities) have to be included.

Dividends accorded to shareholders are also included in the Profit & Loss Account.

The value of fixed assets diminishes (depreciates) with time and agreed rates of depreciation(either agreed with the company auditor or by amortisation) for the different types of assets (machinery, computers, buildings, vehicles, etc.) are applied. The total annual value for depreciation is included in the Profit & Loss Account and is subtracted from Profits.

For aquaculture, stock values are divided into 3 principal categories that form the major components of the Current Assets at any moment:

The techniques for valuation of such stocks can pose problems for both the operator and the auditors (& fiscal authorities) where different countries may also accept different principles. Consequently, the following information can only be considered as being indicative.

Unsold finished products - valued at identifiable production costs or, for simple estimates, at the sale price less profit margin

The valuation of live stocks is often problematic since it is recognisably difficult to count the number of fish and small ones do not have the same value as large ones. In aquaculture, there is also the question of the value of broodstock, particularly if the broodstock are of recognised quality(i.e., hatcheries of ornamental fish producers). So what rules can be applied?

Since stocks are, in accountancy terms, “work in progress” the usual principle to apply is that the stock value should be equal to its direct production cost. In other words, its value should represent all of the inputs used for production (feed, labour etc). There is, however, a genuine problem in calculating this for animals of different sizes and distributing the production costs in a fair and effective manner. . Consequently, it is often easier to calculate appropriate values for size ranges (e.g. 200-250 g.) and use the farm stock records for calculating the total stock value.

These values cannot include a margin for profit nor can they exceed the sale value.

If the product sale values are subject to strong seasonal valuation, agreement must be obtained for the financial year-end value per kg, primarily for finished products. Where values have declined regularly over the years (notably for many species of farmed finfish), a revaluation of the individual stock values may be necessary each year. The major point is to be consistent and not to vary from an established valuation procedure.

The stock values themselves are not included in the Profit & Loss Account but the annual change in value (increase or decrease) is. This is particularly important for farms that are increasing or changing their production activity.

A sequence of the annual figures reported for a company need to be examined closely to be able to see the full trading position of the company. Indeed, in fish farming where growth cycles can last over 2-3 years for certain stocks, a new business will have to wait until several cycles are past before the trends and the routines of its trading accounts become apparent.

Comparisons for financial review should be made between similar times of the year - for example, months or quarters - or from year to year.

Most companies are now equipped with computerised accounting systems which should allow the generation of such data.

The measurement of profit and loss in this Account neither coincides with nor reflects the amount of cash available within a business.

For example, there is always a time difference between cash movements (in and out) and the measurement of profit and loss. A sale is registered in the accounts when invoices are dispatched yet the actual cash payment has yet to be received. Therefore, the position of the company on accruals and prepayments must be known for the exact position to be established. This is a reflection of the working capital required by the company.

Before arriving at a figure for the annual (or projected) profit or loss, a number of judgements will have been made by the companyís management and advisers.

These include the stock values (described above), the expected useful life of the assets of the business (depreciation), the allocation of funds for reserves (future purchases) and the potential for dividend payments.

The information for assessing the performance and profitability of the business is set out in the Balance Sheet which is the starting point for assessing the financial health of the company.

The Balance Sheet is composed of two sides, ASSETS and LIABILITIES, which balance out equally since these two accounts summarise the investments made by the business from the points of view of where the funds have come from and where they have been used and, therefore, they provide a snapshot of the state of the business at a particular point in time.

While the Profit & Loss Account is a report of the operations for and within a specific year, the Balance Sheet is cumulative over time. For example, the fixed assets are all of those that have been purchased by the company since it started unless they have been disposed of.

As market pressures grow (rising market supplies, declining prices), most farmers attempt to increase either production levels or productivity (or both), trying to counter the cash increase required for raising the stock levels (needs for increased production e.g. feeds) with better farm performance (more tons produced per man employed, per kWh consumed etc.). Since these matters directly affect the cash within the business, it is essential to know their effects on the Working Capital and the Cash Flow.

The working capital of a company is the sum of money that is tied up within normal business operations (excluding fixed assets) and its components are the major influence on the overall cash flow. For aquaculture businesses, one of the main elements within this calculation is the value of the standing stocks, the live animals within the farm.

When calculated on a weekly/monthly basis, such estimates reflect the operating cash flow of the company (excluding planned investment expenditure) and are thus an essential part of the operating financial management of the business.

Cash flow forecasts contain the predictions for income and expenditure and also indicate the cumulative cash shortages or surpluses expected during specific budgeting periods (monthly, quarterly etc.).

While expenditure can usually be predicted with a degree of accuracy, monthly sales and prices are highly susceptible to market trends and more difficult to predict.

Therefore cash flow forecasts need to be modelled on the specific nature of the business, monitored regularly and changed when necessary, since comparison with actual income and expenditure becomes simple.

Cash flow forecasting helps the manager to anticipate cash shortages and surpluses, giving valuable time to plan appropriate actions in advance. Doing this also helps you to refine the operating business plan and to build a good relationship with banks, since it indicates your ability to analyse and to determine the needs of your business.

Additional economic indicators can be extracted from the items that are part of this type of analysis such as:

the break-even point - the level of production or sales price required for a set tonnage which gives a zero return (no profit/no loss) to the business

the internal rate of return (IRR) - this is the rate of return (in %) on the investment(s) made in a business that is calculated from a time series of cash-flows and assists the manager to calculate the real worth of the investment

the net present value (NPV) - this is the calculated value, at a specific point in time, of the investment made in a business that uses a time series of cash flows and a discount rate (as the value of the assets decreases).

Another simple table that provides additional assistance for getting a better picture of the business is that of Source & Uses of Funds. This table is very simply a match of where the money comes from and what it is used for and is very similar to a Cash-Flow statement.

These Financial Statements of the business can be compared to a Bus ride. You may have the right destination (the Profit and Loss Account), the bus can get you there since it has an engine, wheels etc. (the Balance Sheet) but you still need the bus fare (Working Capital) to arrive!

Do the fixed assets provide the necessary profits in my industry ?
Are we preparing for their replacement?
Can we pay our bills as they fall due? (Liquidity)
Have we obtained the best funding for the business? (mix of short and long term financing)
If we borrow, can we pay back new loans?

Does the business have the necessary cash available to meet its daily needs and its plans for the future?
This question is raised because of the typical operating characteristics of the aquaculture business which include the long lead-in times to grow the product to market-size that are reflected in the investments made in stocks and the normal risks of the business that include the effects of weather, disease etc.
Do we have the cash needed for stock development?
What happens if we lose stocks?

In conclusion the three main financial statements, namely the Profit and Loss Account, the Balance Sheet and the Cash-Flow Forecast, provide the essential financial information to the manager for analysis of the business. The ability to understand and the skills for using this information are the keys to the success or failure of any business.

Preparing financial statements
Budgeting
Cash-flow forecasting
Computerised accounts
Interpreting financial statements
Business finance and grant aid