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THE ROLE OF FINANCIAL ANALYSIS IN MANAGEMENT CONTROL

CHAPTER ONE

 INTRODUCTION

• BACKGROUND OF THE STUDY

Financial analysis involves reviewing and evaluating a company’s financial statements to make informed economic decisions. These statements typically include the income statement, statement of financial position, statement of cash flows, and statement of profit or loss and other comprehensive income. The analysis employs various techniques to assess risks, performance, financial health, and future prospects of an organization. It is utilized by diverse stakeholders—such as credit and equity investors, government bodies, the public, and internal decision-makers—each with different interests and analytical approaches.

Financial analysis helps identify and address financial challenges a company faces, guiding decisions on the best course of action. To make sound financial decisions, one must detect potential problems and evaluate the impact of alternative strategies. The specifics of financial analysis vary based on the company’s needs and management decisions, including long-term planning, profit forecasting, budgeting for capital investments, operational auditing, mergers and acquisitions, and managing temporary corporate investments.

The primary goal of financial analysis is to enhance the owner’s wealth by increasing the market value of their equity in the business. While financial analysis aims to improve company value, it also requires sensitivity to various factors. Analysts perform periodic tasks such as assessing liquidity, conducting operational audits, and overseeing daily financial activities. Additionally, they have annual or semiannual responsibilities, including sales analysis, debt structure evaluation, financial statement preparation, ratio analysis, and investment management of liquid assets.

Under the Companies and Allied Matters Act of 1990, incorporated companies are required to publish financial statements to assist users in evaluating a company’s profitability and financial position, and to guide investment decisions. These statements adhere to Generally Accepted Accounting Principles (GAAP), providing insights into a company’s financial strengths and weaknesses.

First Bank of Nigeria PLC (First Bank) was established in 1894 by Sir Alfred Jones, a shipping magnate from Liverpool, starting as a small operation in the office of Elder Dempster and Company in Lagos. Initially incorporated as a limited liability company on March 31, 1894, under the name Bank of British West Africa (BBWA) with its head office in Liverpool, the bank underwent several name changes in response to evolving economic conditions. In 1955, it became Bank of West Africa (BWA), and in 1966, following a merger with Standard Bank UK, it was renamed Standard Bank of West Africa Limited. In 1969, it was incorporated locally as Standard Bank of Nigeria Limited, and later changed to First Bank Nigeria Limited in 1979, and finally to First Bank of Nigeria PLC in 1991. The bank expanded its presence with branches in Accra (now Ghana) in 1896, Freetown, Sierra Leone in 1898, Calabar in Nigeria in 1912, and Zaria in 1924. The Kano branch was opened in 1928, and today, First Bank has over 570 branches.

Mr. Stephen Olabisi Onsanya currently serves as the Managing Director/Chief Executive Officer of First Bank of Nigeria PLC. The board of directors includes 7 executive directors and 11 non-executive directors, all of whom bring a high level of competence and experience, with notable achievements in their respective fields.

• STATEMENT OF THE PROBLEM

Some firm do not regard good financial analysis as an aid in management control but many writers have argued that financial analysts help in liquidity and the productivity management of the firm as an indication of good management control through decision making. It is also seen that information available to outsiders is limited to others in the annual reports and accounts which are difficult for them to understand or interpreted. The problems existing when carrying out analysis include changes in assets figures, changes in accounting policies from one period to another, changed in equipment to leasing equipment identifying costs and expenses, identifying financial statement ratio analysis, change in government incentives packages. This project aims at finding out if financial analysis playing a good role in facilitating management control through the use of financial ratio.

Therefore, the problem of the study is to evaluate empirical relationship between financial analysis and management control in terms of liquidity and profitability.