Systems of Financial Analysis Methods
Financial analysis is an important tool to be used by many modern-day businesses and corporations in order to better understand the financial health of the organization and its performance. The purpose of financial analysis is to provide useful financial information deriving from the financial statements and to create useful management decisions that are based on that information. The financial statements of an organization are the main source of data for financial analysis, and it is important that that data is transformed into useful information in order to inform management decisions. Financial analysis can be done in a variety of ways depending on the purpose, and it is essential to choose the right perspective to reflect the needs of the organization correctly. This paper will discuss various systems of financial analysis methods and their benefits to an organization.
Financial analysis methods can in general be placed into two distinct categories: quantitative and qualitative methods. Quantitative methods are techniques that focus on the numerical data and use numerical analysis to gain an understanding of financial performance. These techniques include ratio analysis, which involves calculating a variety of ratios such as the current ratio, gross margin, and return on investment. They can also include trend analysis, which looks at how various financial measures have changed over time, and common size analysis which looks at financial measures expressed as a percentage of sales and other consolidation-level calculations. These quantitative methods provide an “objective” view of an organization’s financial performance and are useful for obtaining a “quick-view” of an organization’s financial position.
Qualitative methods are techniques that take a more subjective approach. They provide insight into the more intangible aspects of financial performance and include techniques such as accounting policies review, management compensation schemes, and customer satisfaction measures. These methods can provide useful insight into the quality of the organization’s financial records, or the resource allocation of management and executives, which can help in making better informed decisions. These techniques also provide the opportunity to explore and utilize different financial data sources, such as the management’s knowledge of the market and industry, to gain a more comprehensive understanding of an organization’s financial performance.
The most effective financial analysis will often employ a combination of quantitative and qualitative methods in order to gain a more complete and holistic understanding of an organization’s financial performance. For example, ratio analysis can be used to analyze the liquidity of a business and identify sources of financing, while a customer satisfaction survey can be used to identify areas where customer service can be improved. These methods should be chosen carefully depending on the types of decisions to be made and the resources available.
There are a variety of systems of financial analysis methods that can be employed in order to gain insight into an organization’s financial performance. These include Du Pont Analysis, which utilizes both ratios and trends to analyze return-on-investment; SWOT analysis, which focuses on analyzing an organization’s strengths, weaknesses, opportunities and threats; and discounted cash flow analysis, which is used to estimate the value of an organization based on its projected future cash flow.
No matter which system of financial analysis methods is used, it is important to ensure that the data being analyzed is accurate, relevant and up-to-date. Furthermore, it is important to ensure that the methods chosen are consistent with the organization’s goals and objectives. The combination of quantitative and qualitative methods should also be considered in order to gain a holistic view of an organization’s financial performance. Ultimately, the goal should be to choose the most appropriate and effective methods that allow the organization to make informed decisions in order to maximize its financial performance.
