Edited by Massimo Ferracci

Part one

LA CORRECT FINANCIAL STATEMENT ANALYSIS AS A DRIVER OF A COMPANY'S DEVELOPMENT. AN EXERCISE OF
GREAT INTEREST IN THE REPRESENTATION OF THE AML RISK PROFILE
The financial statement is a model for representing the company's reality: it is made up of two tables
accounting (balance sheet and income statement) and an explanatory note intended to explain the values ​​of the
financial statements (notes to the financial statements).
The entities that prepare the financial statements according to the IAS/IFRS rules also present the financial statement which is
the table showing the results of the flow analysis.
The balance sheet data can be read to understand the company reality or can be elaborated in various ways
in order to examine particularly relevant management aspects through appropriate re-elaborations of the data and
comparisons of various kinds with other financial statements of the same company or others.
The analysis of the balance sheet, with the aim of identifying the structural inefficiencies of the company and immediately remedying them,
channeling business management decisions towards the paths traced by the results of the analysis, must be carried out
for the very survival of the company on the market, or at least to prevent the drastic reduction of
current profit margins and competitive shares.
On the other hand, companies led by entrepreneurs who, due to incompetence, will inevitably exit the market
they were unable to grasp and overcome corporate pathologies immediately after they occurred,
adapting to the evolution of the economic system: that is, they have not been able to direct their choices
management based on criteria dictated by a careful analysis of the financial statements. In essence, entrepreneurs must improve
their company not for others, but above all for themselves.
The analyses can aim to ascertain different aspects of management, aspects which are however interconnected.
interconnected and communicating. Therefore, we have income analyses, financial analyses, and asset analyses.
The distinction, which is never absolute, concerns the fundamental aspects of business management.
The management of the company, conceived as a system established and managed by man for the satisfaction of
direct or indirect of its needs, is divided into four phases, connected to each other, and consisting of:
– in the acquisition of financial resources (financing) to cover the need for resources for the
company management;
– in the use of financial resources for the acquisition of durable and non-durable production factors
(investment);
– in the implementation of the processes of transformation of production factors into products
(economic-technical production);
– in the sale of products (divestment) in order to obtain the financial resources to be injected
again in the indicated cycle.

The management, which is expressed in the aforementioned phases, which must be coordinated with each other, must tend to
achieve balance, which can be of three types:
– economic balance, which refers to costs, revenues and income, and which consists of the
the company's ability to remunerate all production factors, including the capital contributed by the
owner or partners, without altering the financial balance. In other words, the economic balance is
has when revenues exceed costs by an amount that represents at least the income expected by the
shareholders or members or by the owner;
– financial balance, understood as the company's ability to meet its financial commitments
with the means coming from equity capital, financing and revenues, without prejudice to the
other balances.
When referring to corporate operations understood as sources (acquisition of financial means) and
employment (investment of the same), there is the real financial aspect, while when it is done
reference to the transfers of monetary means of payment (receipts and payments), we have the monetary aspect;
– equity balance, understood as the final result of the two balances previously indicated,
and therefore the company's ability to maintain and improve its financial position.
The analyses are called income or economic if they aim to ascertain the economic equilibrium or certain aspects of it.
aspects; they are financial if they aim to ascertain the financial balance or specific aspects of the same.
The three aspects of business reality are interconnected and not entirely separable, and therefore, the three types of
analyses are not always easily distinguishable.
Economic management, asset management and financial management are three inseparable aspects of the same reality
of a business, in which the financial resources coming from the financing sources are invested
in capital assets (fixed capital or working capital) necessary to develop the production process and
distribution of products in order to achieve, through the comparison of revenues and costs, the
achievement of profit.
Financial difficulties reduce the possibility of making investments and therefore the prospects themselves
company income. Economic difficulties can lead to financial difficulties and
alternate the balance sheets. Good profitability allows for a development policy without altering the
financial situation.
Often the distinction between the various aspects of management is of a temporal nature. In fact, costs and revenues proceed at a
different speed compared to financial flows (the purchase of a technical fixed asset may involve a
immediate outgoing cash flow, while the cost is distributed among the series of financial years involved in the use
of the immobilization). But financial flows also proceed at different speeds, depending on whether they refer
when credits and debits arise, or when cash inflows and outflows occur. As can be seen from the examination of the various aspects
of management is important to understand the consequences of individual operations on the various company balances.
Companies cannot stop at just examining the economic aspect of management but must
carefully evaluate the financial and monetary aspect as well, which means that they must not only
consider the economic feasibility of the programs (what to do), but also the timescales for the implementation of the various
projects (when to do).

The various aspects in which management can manifest itself require carrying out analyses relating to these aspects, but
the unity of the management leads to highlight that the analyses often integrate the different species, therefore the
various aspects are often difficult to separate.

RECLASSIFICATION OF THE BALANCE SHEET
As we have said, the balance sheet has the important function of providing information about the company.
The first step to take, for the purposes of evaluating the economic, financial and business situation by indices and flows,
the company's balance sheet, is to first proceed with a reclassification of the balance sheet. This
operation consists in aggregating and grouping the multiple values ​​of the Balance Sheet to better interpret
the progress of the company.
Having said this, let's get to the technical part, indicating how to rework the two budget statements:
Balance Sheet and Income Statement.

Balance Sheet Reclassification
(financial method)

Balance sheet as of December 31, 2020…
Active	Passive
Fixed assets: tangible, intangible, financial, receivables > 12 months	FIXED ASSETS (AF)	Share Capital (CS) Reserves Operating profit (R) (Operating loss)	NET WORTH (PN)
Warehouse and inventories	STOCKS (S)(availability)	CURRENT ASSETS (AC)	Passive mortgages TFRDeb >12 months Other medium/long-term debts, provisions for risks and charges, tax provisions	CONSOLIDATED LIABILITIES (PL)
Receivables within 12 months, Accrued income and prepaid expenses, Fixed income securities Other credits	DEFERRED LIQUIDITY (Ld)
Deposits and cash	IMMEDIATE LIQUIDITY (Li)	Debts within 12 months Accrued liabilities and deferred income	CURRENT LIABILITIES (PB)
TOTAL ASSETS (A)	TOTAL LIABILITIES (P)

The reclassification criterion lists assets in order of increasing liquidity and liabilities in order of increasing collectability.

Assets are divided into two large sections: fixed assets, which include all fixed assets, and current assets, which are further divided into: inventories, receivables (deferred liquidity), and liquidity (immediate).

Liabilities are divided into equity or equity items (internal financing), consolidated liabilities (all debts due beyond one year), and current liabilities (debts due within one year). Consolidated and current debts together represent external financing (from third parties), which we will call Debt Capital (CC).

Total assets are supported by financing obtained, i.e., by the sources of financing represented by the SP's liabilities. These can be represented by management (self-financing), shareholders (capital increase, etc.), or third parties (debt sources). To achieve equilibrium, the financing sources must correspond (obviously not in a mathematical sense, but reasonably) in terms of duration to the investments.

The reclassification of the income statement

General considerations on the reclassification of the income statement

The reclassification of the income statement can be done according to different criteria, depending on the information results you want to obtain.

The income statement is always reclassified using the progressive form to highlight the intermediate results relevant to the analysis. The results that can be highlighted with the various reclassifications, the meaning of which will be explained below, are as follows:

- gross profit

– added value (abbreviated VA);

– gross operating margin (EBITDA);

– operating income (acronym RO), also called MON (net operating margin) or EBIT;

– result of atypical management;

– financial management results;

– ordinary result before taxes (ROAI);

– result of extraordinary management;

– income before taxes (abbreviated RAI);

– net income (abbreviated RN).

For balance sheet analyses, one of the following income statement configurations is used, keeping in mind that the different configurations depend on the grouping methods of the various items relating to costs and revenues:

– at cost of goods sold and revenues;

– at contribution margin;

– value added and gross operating margin (EBITDA);

– to management zones or areas;

– to the value and costs of production.

We will first discuss the legal framework provided for by Article 2425 of the Civil Code, which is the last one listed, before moving on to examine the other possible income statement configurations studied by scholars and used in practice. Each will be highlighted for its specific informative nature.

Finally, the formats required by the IASB will be considered. The informative value lies in the nature of the partial results highlighted by the different groupings of items.

All reclassification schemes share the fundamental principle of separating core (typical) and non-core operations. It should be noted that the reclassification by production value and added value is the most widely used because it best meets the criteria for classifying items by nature set forth in the Italian Civil Code.

Reclassification of the income statement pursuant to Article 2425 of the Civil Code

The legal format of the Income Statement is that represented by art. 2425 of the Civil Code.

In the table, the value of production is represented by revenues from ordinary activities, capitalizations for internal construction, and changes in inventories of products, semi-finished goods, work-in-progress, and services in progress. Financial income and expenses, taxes, and extraordinary income and expenses are excluded. This results in a partial result that approximates operating income.

This is not operating income due to the presence of some costs and revenues whose nature is not very clear (collected in two residual items) and the devaluation of intangible and tangible fixed assets (included in production costs), which should be considered outside the concept of operating income.

Then there are financial income and expenses, value adjustments to financial assets, extraordinary income and expenses and, finally, taxes.

It is therefore an income statement that requires some processing (especially to determine operating income) before it can be used for analysis.

Even for the income statement they are summarized in figure 2.11 the connections between the income statement pursuant to Article 2425 (the only one freely available to the external financial statement analyst) and the income statement for analysis.

Connections between the income statement pursuant to Article 2425 of the Civil Code and the one to be used for the analysis

+ Operating profit or operating income (RO or EBIT)

A Production value (items 1 to 5)

– B Production costs (items 6 to 14)

+/- Financial management result

C Financial income and expenses (items 15,16,17 and 17  )

D Value adjustments of financial assets (items 18 and 19)

= Result of ordinary operations

+/- Result of extraordinary management

And Extraordinary income and expenses (items 20 and 21)

= Profit before taxes

– Tax management

22 Income taxes for the financial year

= Net profit for the year

An "adjusted" operating income is often determined by taking into account the financial charges implicit in the cost of purchases, which are then added to the operating profit and considered a negative component of the financial management result. A similar procedure is followed for the interest income implicit in sales revenues. It should be remembered that the most appropriate income statement format for analysis purposes requires the separate deduction of taxes on ordinary and extraordinary income.

Value added and gross operating margin income statement

This model, besides being the most used for the reclassification of the CE, is the one we will use for our analysis.

The value-added and gross operating margin (GOM) income statement is a recently used configuration that is very useful for highlighting the creation of wealth by the company (added value) and for connecting the economic aspects with the financial aspects of the income statement.

The gross operating margin is, in fact, the operating economic result expressed in financial terms and therefore, essentially, the self-financing of the characteristic management.

EBITDA is considered an important figure, especially in union negotiations, because it is not influenced by what have often been called budgetary policies, related to depreciation and amortization, and provisions for future expenses and risks. It is, in fact, an intermediate result whose only non-objective element is the valuation of inventories.

It can also be reconstructed on the basis of the income statement referred to in Article 2425 of the Civil Code.

Reclassification of the Income Statement to Value Added

VALUE-ADDED PROFIT AND LOSS ACCOUNT

Net revenues

(+) Other income

(+/-) change in finished product inventories

(+) Capitalized costs

A) Production of the exercise

(-) Purchases of goods

(-) Purchases of services

(-) Use of third party assets (rentals/leasing)

(-) Miscellaneous management costs

(+/-) change in raw material inventories

B) Production costs

VALUE ADDED (A+B)

(-) Wages, salaries and contributions

(-) Provision for severance pay

(-) other personnel costs

C) Cost of labor

GROSS OPERATING MARGIN (A+B+C) = EBITDA

(-) FSC provisions

(-) Other Provisions

(-) Depreciation of tangible assets

(-) Amortization of intangible assets

D) Provisions and amortizations

NET OPERATING PROFIT (A+B+C+D) = EBIT

(-) Financial charges

(+) Financial income

E) Financial management balance

CURRENT INCOME

(-) Extraordinary charges

(+) Extraordinary income

F) Extraordinary management balance

EARNINGS BEFORE TAXES

(-) Taxes and duties

G) Tax burdens

NET INCOME

The scalar form of the Income Statement has the great advantage of providing some intermediate results, very
interesting for understanding the company's performance. In particular, the complex management is divided into three
areas:
– Characteristic management (related to the company's typical activity)
– Financial management (relating to interest on borrowed and lent capital)
– Extraordinary management (relating to one-off operations, not included in normal business activities)
entrepreneurial, such as the sale of assets)
The intermediate results relating to these three large sectors provide very important information, because they allow
to break down the final result (profit or loss) into its main components and then identify the area
on which to intervene if necessary.
Furthermore, in the characteristic management, another interesting intermediate result is highlighted, which is the margin
gross, which quantifies the raw data of the markup on sales, obtained from the difference between turnover
and cost of goods sold (cost of goods sold = opening balances + purchases – closing balances).
The second part of the article will be published in the next issue of the newsletter.