Financial Analysis
Understanding financial analysis is an essential part of a effective business strategy and successful financial management. Financial analysis is a process of evaluating the past, current, and future financial and economic performances of a company or organization. To undertake financial analysis, typically requires the preparation of financial statements, such as a balance sheet, income statement, statement of cash flows and statement of changes in equity. Financial analysis is used to identify trends and relationships between financial data which can then be used to make decisions and predictions about the future performance of an enterprise.
Financial analysis most commonly includes the ratio analysis which is the analysis and comparison of different financial ratios to determine the financial health of a company. Financial ratios are also used to compare a company to industry averages and to compare one company to another. Financial ratios typically include return on equity, asset utilization, debt to equity, times interest earned and cash flow.
Financial analysis also includes cash flow analysis which is used to determine the ability of an enterprise to generate cash. Cash flow analysis is useful for predicting future cash flows, managing liquidity and evaluating the ability of a business to meet current obligations. Cash flow analysis typically includes a projected cash flow statement, a detailed analysis of sources and uses of cash and a forecast of future cash flows.
Additionally, financial analysis also includes trend analysis. Trend analysis is an analysis of financial data to assess the long-term direction of a business. Trend analysis typically involves plotting financial data to observe the direction of the trend, analyzing the causes of a particular trend, and forecasting future trends. Trend analysis is used to analyze a company’s growth, profitability, and liquidity and to assess the company’s performance against industry averages.
Other analysis conducted as part of a financial analysis includes sensitivity analysis which is the analysis of factors which affect the key indicators of a companys financial performance. Sensitivity analysis typically includes studying changes in sales, costs, taxes, and debt loads and how they impact certain financial metrics.
Lastly, financial analysis also includes comparative analysis which is the comparison of financial data from different periods or different companies. Comparative analysis is used to understand how a company’s performance stacks up against others in the industry and to identify strengths and weaknesses in its financial performance.
In conclusion, financial analysis is an essential process for a effective business strategy and successful financial management. Financial analysis usually includes ratio analysis, cash flow analysis, trend analysis, sensitivity analysis and comparative analysis. These techniques are used to assess the current and future financial performance of an organization and to make decisions and predictions about its future.
