Business Management

Limitations and Errors in Financial Analysis for Organizational Sustainability

Despite the breadth and versatility of the application of analysis in balance sheet and income statement, there are a number of limitations to the values of this method.

This is the second part of the article, incase you miss the part 1 of this topic “Sustainability“, here a link to the article

There are cases when balance sheet analysis is ineffective, such as:

  1. The situation in the economy is characterized by general in op resoluteness and instability. This is typical of periods of deep economic crises, when negative factors such as ultra-high inflation and political instability set in.
  2. The organization is working on large-scale projects, under the implementation of which it is necessary to take bank loans. There is a high chance that this can largely deform the balance of the organization for the period of work on the project. During this time, it reflects both accounts payable and outstanding capital investment.
  3. The organization is small and has an undeveloped balance sheet. When it becomes necessary to analyze specific transactions that are carried out by this organization, its clients.
  4. The functions of the organization are not related to production. For example, it functions as a current account for other organizations, does not carry out its main activity, is an intermediary in trading operations, or rents out property.
  5. The conditions for the functioning of the organization are specific. If an organization operates in a competitive environment, then the analysis of its balance can give good results.

But it doesn’t give insight into success factors that are not related to the structure of assets or liabilities, such as the presence of special benefits or advantages, patents, quotas, licenses, or monopoly market position. Then specialists should analyze the enterprise’s resilience to sudden changes.

For some reason, the balance sheet analysis did not reveal any deviations from the norm. Then the analysis should be more in-depth and affect all aspects of the organization.

Possible errors in the financial analysis

Limited search for “bottlenecks” is one of the possible errors in the financial analysis of the enterprise. Movement of funds on accounts organization, for example, should be monitored by both financiers and managers.

Therefore, it becomes necessary to monitor the movement of receivables and payables. However, if only named accounts are monitored, then the patterns of movement of personal funds cannot be determined.

If, however, a comprehensive analysis is carried out on a wide range of factors affecting the dynamics of personal funds of the organization, then the inefficiency of such a narrow sub-progress will be obvious.

Not only is there a lack of necessary data, but there are also errors in them, which may be due to their collection and pre-processing.

One such example would be the desire to analyze and compare the efficiency of different industries of one organization, not taking into account the methods of decomposition of overhead moves, ways to write off the cost of materials for cost, etc.

Some adjustments are necessary for calculations, which may be due to known shortcomings reporting forms.

Thus, if according to the results of the analysis, the indicators of the financial stability of the organization are unsatisfactory, then the question arises about the

  • prospects of its further development,
  • change of course in management, or
  • abandonment of the existing profile of the enterprise.

In this case, there may be changes in the organization’s strategy, such as

  • clarification of the mission,
  • development of measures to increase motivation,
  • developing strategic and operational controlling.

The mission of the organization gives impetus to the development of its main strategy, goals and objectives, provides for the possibility of maintaining a certain status and developing competitive advantages property in the long run.

Taking into account the identified shortcomings of the analysis methods of financial stability of the organization and the problems studied functioning of business structures in the construction industry and investments

…there is, in our opinion, the need to detail previously formulated concept of organizational sustainability for the most effective search for solutions to existing problems stability.

To the first group of problems identified in the course of the study, can be attributed to the growing level of competition, which has impact on the activities of Russian organizations: on their costs, prices, profits and organizational structure.

Modern conditions of competition definitely have influence on the pricing policy of organizations, force organizations in order to increase the sustainability of entrepreneurial structures, one possible solution may be to choose the optimal organization structure.

The need to integrate medium and small market participants, the absence of a mechanism for intersectoral capital flow, and the activity of the mergers and acquisitions market can all contribute to the challenge of increasing sustainability.

The optimal structure for an organization can be defined in each specific case, depending on the goals of the organization.

The organizational structure of an organization is comprised of functional units, such as services, departments, and production military units, and their connections, which are arranged in a certain hierarchy and perform the functions of development in accordance with the structure of water or innovation cycle.

To understand the relationship between organizational structure and stability, we can turn to the theory of organizational organizations.

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Tofunmi is a BA, MBA, and experienced Researcher in Business Administration and Management. He possesses outstanding communication, leadership, conflict resolution, organization, and teamwork skills. He enjoys teaching and reading books on startups, business, personal finance, investment, and more.

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