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Financial Analysis
Financial Analysis
All companies need to analyze their financial status periodically by analyzing important financial data of their company. The financial officer of the firm interprets the financial statements of the company and creates a report for the management after conducting a financial analysis of these statements. The report is then used by the top management for decision making.
Financial analysis is one of the most key performance indicators for any business. This can be seen by the following characteristics:
- To understand whether the main operations or a certain operation of the business should be continued or discontinued.
- To study the raw materials required for the manufacturing of a product in terms of its purchase
- To take machineries for the production of these goods by renting/ leasing them or acquiring them
- To increase the working capital of the company by issuing stocks or through a bank loan
- To enable decision making for investing or lending capital
- To be able to make other decisions regarding the financial situation of the company with the management
In this way, by conducting financial analysis of a company, one can assess the financial state of the company and its ability to generate revenue. Solvency of the firm can be judged with financial statements indicating the company's ability to pay its creditors in the short-term and the long-term. A financial analysis report of the company can also judge the company's liquidity with the company's financial ability to maintain positive cash flows.
Evaluation of a company's stability is often carried out with the aid of the many financial statements and non-financial indicators.
Analysis of Financial Statement
While conducting the analysis of financial statement(s) of a company, one will need to consider the past performance of the company. The analysis of financial statements of the firm is most often done with the aid of mathematical and statistical tools; the future performance of the company can be extrapolated. Comparative and financial ratio analysis is the most common method of vertical and horizontal financial analysis many businesses use to evaluate their financial state and performance. Financial analysis gives a holistic picture to the top management on important decisions regarding financial investments, key production decisions etc.
Business Financial Analysis
Business financial analysis is the analysis of the company's business with other similar businesses. This will help the company analyze the financial statements in order to get a peer group assessment of the company's financial standing. A trend analysis is also done to assess the company's progress in the business over the years. This financial analysis is conducted over a period of five years to be able to predict accurately the future trend of the business. Business financial analysis can be done for each of the businesses of a large company. Each of the businesses can compare the level of contribution they have in the company's overall profits. The top management usually assesses this in order to evaluate profitable and non-profitable businesses through the business financial analysis report.
Balance Sheet Ratios
Balance sheet ratios help financial officer(s) of a company conduct financial analysis based on the annual balance sheet of the company. Balance sheet ratios are based on three aspects of the balance sheet; they are assets, liquidity and equity. Here, assets are a total of the shareholder's equity and liabilities.
