Management Skills – Creative Thinking in Business

Humans automatically relate new things that happen with something within our experience. We are biologically primed to learn from past events .This is usually helpful to us as it lets us draw on our background and experience, and build on what we have previously learned.

We are naturally lazy thinkers and so we tend to think in clichés or established patterns. But this restricts our ability to think creatively and we have to actually force ourselves to think “outside the box“.

Creative thinking then, is looking at things from a different perspective from the obvious one, developing new ideas, asking different questions, restating the question, broadening the issues. It is truly a state of mind.

What is creative thinking?

Creative thinking is the ability to come up with a new and different perspective –breaking down the topic and restructuring it to gain new insights, by organising our thoughts differently. There are many definitions of creativity, ranging from a process of identifying gaps in knowledge, searching for solutions and formulating hypotheses, the personal discovery process, problem solving, to escape from assumptions.

It can be seen as the ability to think beyond the obvious and avoid the pitfalls of making assumptions, thinking new and different thoughts, producing new ideas. Perhaps a good definition is seeing the same thing everyone else sees, but interpreting opportunities differently, putting a different spin on things, thinking “outside the box.”

Creative thinking can lead to the invention of a new product or service, or process. Or it may lead to the combination of existing things in a new, different way. In business this can lead to new products or new processes that can perhaps reduce costs. It can help a business stand out from the crowd by doing something different from its competitors, and allow them to gain a competitive edge.

An accelerating pace of technological change means that many business problems we encounter now have no precedent. Doing things the way we have always done them is no longer going to be effective. Creative thinking is now accepted as important to business success, and to anyone in a leadership role.

What business tools are there? Continue reading Management Skills – Creative Thinking in Business

Business Tips: Analysis of Financial Statement of a Company

One of the major aspects while taking a right investment decision is to analyze the financial statements of any company. Financial Statement analysis is a process to select, evaluate and interpret financial data in order to assess a company’s past, present and future financial performance. Various questions about the company like whether it has debt repaying capacity, is it financially sound or stressed, does it have an apt financial mix, is it rightly placed to provide returns to shareholders, revenue generating efficiency, working capital management being among the major ones which can be analyzed to a larger extent through financial reports. Although the information used is historical, the purpose is to arrive to future forecasts and an estimated performance of the company.

Methods of Financial Statement Analysis:

Academically, we are all aware of common size analysis which is restating the financial information in a standardized format. This could be done by horizontal analysis which compares two or more years of financial data in both Rupee and percentage form and vertical where each category of accounts on the balance sheet is shown as a percentage of the total accounts. This can be complimented with the DuPont model and also ratio analysis. Furthermore, we then use relationships among financial statement accounts, forecasting the company’s future income statements and balance sheets, to see how the company’s performance is likely to evolve. This step is normally based on the guidance given by the company management.

Users of Analysis:

Financial analysis is carried out by investors, regulators, lenders and suppliers to decide whether to invest in a particular company, whether to extend credit to it or no. The management of the company also carries out financial analysis to evaluate the current performance and implement strategies for the future. A thorough financial analysis of a company is examining its efficiency in putting its assets to work, its liquidity position, its solvency and its profitability.

To start off, the annual report of the past 3-5 years of the company is to be acquired. The various components of the annual report add to the conclusion drawn on the company. The different parts of the financial statements need to be scanned for abnormalities, and if any found, reasons for the same are to be chalked.

Income statement:

The revenue model is an outcome of the reported income statement. The past data has to be seen to model growth of the company. Consistency is preferred to swings in the statement. Erratic movements build suspicion. The expense part of the model should have percent to sales calculated, like percent of cost of goods sold over sales, general and administrative expenses over sales to mention a few. This also helps in determining a spending trend, reflecting the strategy of the company. Further, non-recurring and non operative expenses also need to be analysed for concluding the earnings quality. One of the major expense that needs to be calculated is the cost of raw material and that too after taking the adjustments (increase/decrease) of inventory. The operating ratio which in common parlance is known as EBIDTA is also the key as it truly reflects the management efficiency in controlling costs. It also depicts the effective utilization of the installed capacity.

Balance sheet: Continue reading Business Tips: Analysis of Financial Statement of a Company