Month: September 2022

The International Finance Corporation (IFC) is an international financial institution that offers investment, advisory, and asset-management services to encourage private-sector development in less developed countries. The IFC is a member of the World Bank Group and is headquartered in Washington, D.C. in the United States.

It was established in 1956, as the private-sector arm of the World Bank Group, to advance economic development by investing in for-profit and commercial projects for poverty reduction and promoting development. The IFC’s stated aim is to create opportunities for people to escape poverty and achieve better living standards by mobilizing financial resources for private enterprise, promoting accessible and competitive markets, supporting businesses and other private-sector entities, and creating jobs and delivering necessary services to those who are poverty stricken or otherwise vulnerable.

Since 2009, the IFC has focused on a set of development goals that its projects are expected to target. Its goals are to increase sustainable agriculture opportunities, improve healthcare and education, increase access to financing for microfinance and business clients, advance infrastructure, help small businesses grow revenues, and invest in climate health.

The IFC is owned and governed by its member countries but has its own executive leadership and staff that conduct its normal business operations. It is a corporation whose shareholders are member governments that provide paid-in capital and have the right to vote on its matters. Originally, it was more financially integrated with the World Bank Group, but later, the IFC was established separately and eventually became authorized to operate as a financially autonomous entity and make independent investment decisions.

It offers an array of debt and equity financing services and helps companies face their risk exposures while refraining from participating in a management capacity. The corporation also offers advice to companies on making decisions, evaluating their impact on the environment and society, and being responsible. It advises governments on building infrastructure and partnerships to further support private sector development.

The corporation is assessed by an independent evaluator each year. In 2011, its evaluation report recognized that its investments performed well and reduced poverty, but recommended that the corporation define poverty and expected outcomes more explicitly to better-understand its effectiveness and approach poverty reduction more strategically. The corporation’s total investments in 2011 amounted to $18.66 billion. It committed $820 million to advisory services for 642 projects in 2011, and held $24.5 billion worth of liquid assets. The IFC is in good financial standing and received the highest ratings from two independent credit rating agencies in 2018.

IFC comes under frequent criticism from NGOs that it is not able to track its money because of its use of financial intermediaries. For example, a report by Oxfam International and other NGOs in 2015, “The Suffering of Others,” found the IFC was not performing enough due diligence and managing risk in many of its investments in third-party lenders.

Functions

Investment services

The IFC’s investment services consist of loans, equity, trade finance, syndicated loans, structured and securitized finance, client risk management services, treasury services, and liquidity management. In its fiscal year 2010, the IFC invested $12.7 billion in 528 projects across 103 countries. Of that total investment commitment, approximately 39% ($4.9 billion) was invested into 255 projects across 58 member nations of the World Bank’s International Development Association (IDA).

The IFC makes loans to businesses and private projects generally with maturities of seven to twelve years. It determines a suitable repayment schedule and grace period for each loan individually to meet borrowers’ currency and cash flow requirements. The IFC may provide longer-term loans or extend grace periods if a project is deemed to warrant it. Leasing companies and financial intermediaries may also receive loans from the IFC.

Though loans have traditionally been denominated in hard currencies, the IFC has endeavored to structure loan products in local currencies. Its disbursement portfolio included loans denominated in 25 local currencies in 2010, and 45 local currencies in 2011, funded largely through swap markets. Local financial markets development is one of IFC’s strategic focus areas. In line with its AAA rating, it has strict concentration, liquidity, asset-liability and other policies. The IFC committed to approximately $5.7 billion in new loans in 2010, and $5 billion in 2011.

Advisory services

In addition to its investment activities the IFC provides a range of advisory services to support corporate decisionmaking regarding business, environment, social impact, and sustainability. The IFC’s corporate advice targets governance, managerial capacity, scalability, and corporate responsibility. It prioritizes the encouragement of reforms that improve the trade friendliness and ease of doing business in an effort to advise countries on fostering a suitable investment climate. It also offers advice to governments on infrastructure development and public-private partnerships. The IFC attempts to guide businesses toward more sustainable practices particularly with regards to having good governance, supporting women in business, and proactively combating climate change. The International Finance Corporation has stated that cities in emerging markets can attract more than $29 trillion in climate-related sectors by 2030.

Asset management company

The IFC established IFC Asset Management Company LLC (IFC AMC) in 2009 as a wholly owned subsidiary to manage all capital funds to be invested in emerging markets. The AMC manages capital mobilized by the IFC as well as by third parties such as sovereign or pension funds, and other development financing organizations. Despite being owned by the IFC, the AMC has investment decision autonomy and is charged with a fiduciary responsibility to the four individual funds under its management. It also aims to mobilize additional capital for IFC investments as it can make certain types of investments which the IFC cannot. As of 2011, the AMC managed the IFC Capitalization Fund (Equity) Fund, L.P., the IFC Capitalization (Subordinated Debt) Fund, L.P., the IFC African, Latin American, and Caribbean Fund, L.P., and the Africa Capitalization Fund, Ltd. The IFC Capitalization (Equity) Fund holds $1.3 billion in equity, while the IFC Capitalization (Subordinated Debt) Fund is valued at $1.7 billion. The IFC African, Latin American, and Caribbean Fund (referred to as the IFC ALAC Fund) was created in 2010 and is worth $1 billion. As of March 2012, the ALAC Fund has invested a total of $349.1 million into twelve businesses. The Africa Capitalization Fund was set up in 2011 to invest in commercial banks in both Northern and Sub-Saharan Africa and its commitments totaled $181.8 million in March 2012. As of 2018, Marcos Brujis serves as CEO of the AMC.

Sustainability

IFC Sustainability Framework articulates IFC’s commitment to sustainable development and is part of its approach to risk management. IFC’s Environmental and social policies, guidelines, and tools are widely adopted as market standards and embedded in operational policies by corporations, investors, financial intermediaries, stock exchanges, regulators, and countries. In particular, the EHS Guidelines contain the performance levels and measures that are normally acceptable to the World Bank Group and that are generally considered to be achievable in new facilities at reasonable costs by existing technology.

Green buildings in less developed countries

The IFC has created a mass-market certification system for fast growing emerging markets called EDGE (“Excellence in Design for Greater Efficiencies”). IFC and the World Green Building Council have partnered to accelerate green building growth in less developed counties. The target is to scale up green buildings over a seven-year period until 20% of the property market is saturated. Certification occurs when the EDGE standard is met, which requires 20% less energy, water, and materials than conventional homes.

A common size income statement is an income statement in which each line item is expressed as a percentage of the value of revenue or sales. It is used for vertical analysis, in which each line item in a financial statement is represented as a percentage of a base figure within the statement.

Common size financial statements help to analyze and compare a company’s performance over several periods with varying sales figures. The common size percentages can be subsequently compared to those of competitors to determine how the company is performing relative to the industry.

• In financial statement analysis, it is used to compare companies that operate in the same or different industries or to compare the performance of the same company over different time periods.
• Further, it helps a financial analyst establish a relationship between each of the accounts in the income statement and the total sales and eventually helps ascertain how each of the accounts affects the total profitability.
• From an investor’s perspective, it gives a clear picture of the various expense accounts, which are subtracted from the total sales to generate the net income.

Advantages

• It helps in assessing the trend in each line item of the income statement w.r.t. across time periods. Any unusual variation can be easily identified through this technique.
• It can facilitate comprehending the impact of all line items of the income statement on the company’s profitability as it expresses them in terms of the percentage of total sales.
• It can be used to compare the financial performances of different entities irrespective of the scale of operation as it is expressed in terms of percentage.

Disadvantages

• Some of the experts find common size income statements to be useless as there is no approved standard benchmark for the proportion of each item.
• A comparative study based on a common size income statement will be misleading if there is a lack of consistency in its method of preparation.

Limitations

• It does not facilitate the decision-making process due to the lack of any approved standard benchmark.
• One can’t write-off the risk of window dressing of financial statements as the actual figures are not required since the analysis is limited to percentage.
• At times it also fails to identify the qualitative elements during the evaluation of the performance of a company.
• It can be misleading for a business that is impacted by seasonal fluctuations.

A comparative analysis is one of the widely used tools to analyze financial statements. It is an act of comparing the report for 2 or more financial years or any given period. A comparative balance sheet is one of the most sought financial statements by the business. The biggest advantage of comparing financial statements over time is discovering trends, analyzing the findings and taking suitable decisions.

To define comparative financial statements, it’s a financial statement which represents the financial position over different periods of time. The financial position is represented in a comparative form to give an idea of financial position at two or more periods.

Generally, two financial statements are prepared in comparative form for financial analysis

Included in a Comparative Balance Sheet

The line items that are included in a comparative balance sheet are the same that are included in an individual balance sheet. The general categories included are: assets, liabilities, and equity. The categories are further broken down into current assets, current liabilities, long-term assets, and long-term liabilities.

More specifically, common balance sheet items are as follows:

Current assets:

• Cash
• Accounts receivable
• Inventory
• Prepaid expenses

Long-term assets:

• Fixed assets
• Long-term investments

Current liabilities:

• Accounts payable
• Accrued expenses (such as payroll and payroll taxes)
• Notes payable

Long-term liabilities:

• Long-term bank loans
• Other long-term debt

Equity:

• Common stock
• Retained earnings

Format:

Advantages of Comparative Balance Sheet

• Trend Indicator: It shows the company’s trend by putting several years’ financial figures in one place like an Increase or Decrease in profit, current assets, current liabilities, loans, reserves & surplus, or any other items that help investors make the decision.
• Comparison: It is effortless to compare the figures for the current year with the previous years as it gives both the years’ figures in one place. It also assists in analyzing the data of two or more companies or subsidiaries of one company.
• Compare performance with the Industry Performance: Helps to compare one company’s performance with another company or the industry’s average performance.
• Ratio Analysis: Financial ratio is derived from the balance sheet items. The comparative balance sheet’s financial ratio of two years of two companies can be derived to analyze the company’s financial status. For example, the current ratio is derived with the help of current assets and current liabilities. If the current ratio of the current year is more than the last year, it shows the company’s liabilities have been reduced from last year against the existing assets.
• Helps in Forecasting: It also helps in forecasting because it provides the past trend of the company based on which the management can forecast the company’s financial position.

Limitation/Disadvantages

• Inflationary Effect is not Considered: While preparing the comparative balance sheet, the inflation effect is not considered. Therefore, only a comparison with other balance sheets will not give the correct picture of the company’s trend.
• Uniformity in Policy and Principles: Comparative balance sheets will not give the correct comparison if two companies have adopted different policies and accounting principles while preparing the balance sheet or if the same company has adopted other accounting methods in two additional years.
• Market Situation and Political Conditions not Considered: While preparing the comparative balance sheet, marketing conditions, political environment, or any factor affecting the company’s business are not considered. Therefore, it does not give the correct picture every time. For example, suppose the overall economy is going down in the current year, or the political condition is unstable compared to last year. In that case, it will decrease the demand, and general company sales will experience de-growth, not because of its performance but external factors.
• Misleading Information: Sometimes, it gives misleading information, thus, misguiding the person who reads the comparative balance sheet. For example, if a product was unavailable for last year and is available for the current year, it will show a 100% change over the previous year. It implies that one needs to read the complete financial statement, not just a comparative balance sheet.

A Comparative Income Statement shows the operating results for several accounting periods. It helps the reader of such a statement to compare the results over the different periods for better understanding and detailed analysis of variation of line-wise items of Income Statement.

• Comparative Income Statement format combines several Income Statements as columns in a Single Statement, which helps the reader analyze trends and measure the performance over different reporting periods.
• It can also be used to compare two different companies’ operating metrics. Such Analysis helps in comparing the performance with another business, which can analyze how companies react to market conditions affecting the companies belonging to the same Industry.
• Thus Comparative Income Statement is an essential tool through which the result of operations of a business (or, say, the operation of the business of different companies) over multiple accounting periods can be analyzed to understand the various factors contributing to the change over the period for better interpretation and analysis.
• It helps various stakeholders of the business and the Analyst community to analyze the impact of business decisions over the company’s top line and bottom line and helps identify various trends over the period, which otherwise would have been difficult and time-consuming.
• Comparative Income Statement shows absolute figures, changes in absolute figures, unlimited data in terms of percentages, and an increase (or decrease) in percentages over the different periods. With the help of a Comparative Income Statement format in one snapshot, a company’s performance over different periods can be compared, and changes in expense items and Sales can be easily ascertained.

Comparative income statement analysis

To understand your financial data, do a comparative income statement analysis. There are two ways you can look at information: horizontal and vertical.

Each kind of analysis gives different insights into business performance. The analyses help you make sense of your comparative profit and loss statement and see patterns.

Horizontal analysis

A horizontal, or time series, analysis looks at trends over time. You can see growth patterns and seasonality. When calculating growth, look at the percentage of change between accounting periods.

Vertical analysis

A vertical, or common-size, analysis looks at the relative size of line items. It allows you to compare income statements from different-sized companies. To compare competing businesses, find the percentage of revenue for each line item.

Income statements of companies of different sizes. It shows each item on the Income Statement as a percentage of Base figures (usually the Sales figure) with the statement. Under this, all components of Income statements are shown as a percentage of sales, such as Gross Profit, Net Profit, Cost of Sales, etc., which makes it very handy to use even when comparing differently as it removes the Size biases and makes the analysis more straightforward and understandable. It is mostly used for individual statements for a reporting period but can also be used for timeline analysis.

Reasons:

As a small business owner, you need to measure performance. If you don’t, how do you know if the decisions you make for your business are working? Looking at a comparative income statement helps you analyze profitability over time.

You can use a comparative income statement to look at important financial figures. Patterns in past figures can guide you in the future. For example, you compare last year’s return on investment (ROI) to the current year. This tells you if the money you put into your business brings in a greater amount of income.

Comparative income statements can also reveal if your costs and revenues are consistent. Let’s say in three years your cost of goods sold (COGS) goes from 25% of sales to 40% of sales. By recognizing the increase, you can find solutions to reduce COGS.

Business investors use comparative income statements to look at different companies. The comparison helps them decide which business is a better investment.

Advantages of a Comparative Income Statement

Spikes and dips in revenues and expenses are immediately obvious when this format is used, and can then be investigated by management. In particular, one could use the report to discern patterns in sales from month to month that might be used to forecast future sales.

• It makes analysis simple and fast as past figures can easily be compared with the current figures without referring to separate past Income Statements.
• It makes comparisons across different companies also easy and helps analyze the efficiency both at Gross Profit Level and Net Profit Level.
• It shows percentage changes in all income statement line items, which makes analysis and Interpretation of Top Line (Sales) and Bottom Line (Net Profit) easy and more informative.

Disadvantages of a Comparative Income Statement

The results of this comparison may not be useful if an account has been shifted into a different line item at some point during the reporting period. Such a change would cause a downward spike in one line item and an upward spike in another line item. Consequently, such changes in reporting should be as infrequent as possible, or all clustered at the beginning of a fiscal year.

• Financial Data reported in the Comparative Income Statement is useful only if the same accounting principles are followed to prepare such statements. If the deviation is observed, such a Comparative Income Statement will not serve the intended purpose.
• A comparative Income Statement is not of much use in cases where the company has diversified into new business lines, which have drastically impacted Sales and profitability.

Financial analysts play a critical role in an organization’s daily operations. At a high level, they research and utilize financial data to understand the business and market to see how an organization stacks up. Based on general economic conditions and internal data, they recommend actions for the company to take, like selling stock or making other investments.

A financial analyst is responsible for a variety of research tasks in order to inform investment strategy and make investment decisions for their company or clients. This can include things like evaluating financial data, examining current events and market developments, examining an organization’s financial statements, and creating financial models to predict future performance. Depending on the position, analysts can monitor macroeconomic trends or have a narrow focus on specific sectors and industries. These roles are data-intensive and require strong mathematical and analytical skills. Given the value of their role, financial analysts can be employed by large corporations such as investment banks, insurance companies, mutual funds, hedge funds, pension funds, securities firms, investment firms, private equity groups, venture capital firms, government agencies, and similar types of organizations.

Of course, this is just skimming the surface of a financial analyst’s responsibilities. Here are some of the more specific tasks these professionals might perform for a company, according to the Corporate Finance Institute:

Gather and organize information: Whether it’s a company’s historical financial reports and accounting data or macroeconomic information and industry research, an analyst must know how to find, collect and organize vast amounts of information relevant to their business and industry. They use their research skills to review internal databases and reports from government agencies and enter them into a database, like an Excel spreadsheet.

Examine financial statements: A company’s financial statements hold a wealth of important information for a financial analyst. Using these documents (and those sorted into internal databases), they are able to determine the value of the organization. This is one of the most important responsibilities of financial analysts, as this information guides their recommendations and serves as a benchmark for the company’s performance.

Recommend investments: After analyzing all of this information, financial analysts develop a forecast about the market and how the company will perform in the future. This is where they must use their outside knowledge alongside the financial calculations to make recommendations to company officials or investment bankers. A financial analyst will create a portfolio filled with reports backing up their recommendations.

A financial analyst must be prepared to take on many responsibilities. They must conduct research and financial analysis, connect with management teams and company officials and generate written reports and presentations. This is different from an accountant who would be concerned with a company’s financials from an operational perspective, rather than the big-picture, strategic angle of a financial analyst.

Financial analysts work in a number of different industries, including securities, commodities, contracts, investment banking and other financial services. And while the general responsibilities of this role are outlined above, the Bureau of Labor Statistics noted that a financial analyst can choose a specialization based on their professional capacities.

Here are some of the specific roles someone with this expertise can take on:

Fund management: These analysts exclusively work with hedge or mutual funds. They assist management teams and evaluate their strength to help make investment decisions in line with current market trends.

Portfolio management: Every organization wants a strong portfolio. This requires the right balance of products, services, industries and global regions in which to invest, helping the longevity and success of their company. Financial analysts use their expertise to analyze market and business data to recommend a positive investment strategy and measure results.

Ratings analysis: This niche analysis focuses on guiding businesses or government agencies through the best strategies to pay down debts, like bonds. These analysts are heavily involved in understanding a company’s debts and the risk involved if it was unable to repay them.

Risk analyses: As the title suggests, a financial analyst specializing in risk assesses the company’s financial strategy to locate potential sources of loss. However, unlike the previous role, these analysts aim to reduce the risk involved with financial investments and maximize profits.

A senior financial analyst, on the other hand, would take a more active role in building a financial model, forecasting trends and making business recommendations. That’s because they may have a master’s degree with a discipline in finance and more years of experience in the industry or with the company itself. They typically lead a team of analysts and manage workflows to ensure reports and recommendations are ready when business leaders need them.

Most financial analyst job descriptions, whether buy-side or sell-side, include the following key responsibilities:

• Research industry-specific financial developments including broad economic trends and business trends
• Analyze financial statements to evaluate investment opportunities
• Create financial modeling for investors to find profitable investments
• Recommend individual investments and collections of investments
• Asses the performance of stocks, other types of investments, and bonds
• Translate financial data into detailed presentations and easy-to-understand financial reports
• Communicate with C-suite executives from client companies to understand company needs
• Stay up to date with new technologies and market conditions