Financial analysis is the process of using our business intelligence platform while evaluating businesses, projects, budgets and other finance-related entities to determine their performance and suitability. Typically, financial analysis is used to analyze whether an entity is stable, solvent, liquid or profitable enough to warrant a monetary investment

Make smarter business decisions by knowing where your company or your competitors stand in the marketplace

Financial analysis is referred to as a process of understanding the risk and profitability of a company by analyzing reported financial information, especially annual and quarterly reports to determine the past, current, and prospective performance of a company. It can be applied in a variety of situations to allow business leaders the crucial information they need to make critical decisions. Among the abilities required to understand and manage a business is fluency in the language of finance—the ability to read and understand financial data as well as present information in the form of financial reports.

What Is Financial Analysis

Advantages of Financial Statement Analysis

  • The most important benefit if financial statement analysis is that it provides an idea to the investors about deciding on investing their funds in a particular company.

  • Another advantage of financial statement analysis is that regulatory authorities like IRAS can ensure the company follows the required accounting standards.

  • Financial statement analysis is helpful to the government agencies in analyzing the taxation owed to the firm.

  • Above all, the company is able to analyze its own performance over a set time period.

It is only one part of the overall function of finance, but it is a very important one. A company’s accounts and statements contain a great deal of information. Discovering the full meaning contained in the statements is at the heart of financial analysis. Understanding how accounts relate to one another is part of financial analysis. Another part of financial analysis involves using the numerical data contained in company statements to uncover patterns of activity that may not be apparent on the surface.​

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The systematic process of analyzing or examination of financial information of the company to reach a business decision

People in the company examine how stable, solvent and profitable business or any project of the company and these assessments are carried out by examining the income statement, balance statement and cash flow statement of the company. A person after assessing the company’s performance by using financial data present findings to top management of a company with the recommendations about how it can improve in the future.

Financial Analysis is also used to evaluate economic trends, set financial policy, build long-term plans for business activity, and identify projects or companies for investment. This is done through the synthesis of financial numbers and data. A financial analyst will thoroughly examine a company’s financial statements—the income statement, balance sheet, and cash flow statement. This also gives you a clear view for Risk Assessment

Financial Analysis is one of the best indicators of your business’s potential for long-term growth. The Federal Reserve Bank of Chicago’s recent Small Business Financial Health Analysis indicates business owners knowledgeable about business finance tend to have companies with greater revenues and profits, more employees and generally more success.

The first step toward improving financial literacy is to conduct a financial analysis of your business. A proper analysis consists of five key areas, each containing its own set of data points and ratios.

REVENUES

Revenues are probably your business’s main source of cash. The quantity, quality and timing of revenues can determine long-term success.

Operational efficiency measures how well you’re using the company’s resources. A lack of operational efficiency leads to smaller profits and weaker growth.

PROFITS

If you can’t generate profits consistently, your business may not survive in the long run. Business owners who understands their numbers well, gain unparalleled advantages.

OPERATIONAL EFFICIENCY

Basis For Comparison

The final part of the financial analysis is to establish a proper basis for comparison, so you can determine if performance is aligned with appropriate benchmarks. This works for each data point individually as well as for your overall financial condition.​

The first basis is your company’s past, to determine if your financial health is improving or worsening. Typically, the past three years of performance is sufficient. You're able to conduct a Financial Analysis on your company's health based off three years of data,but if access to older data is available, you should use that as well. Looking at your past and present financial condition also helps you spot trends. If, for example, liquidity has decreased consistently, you can make changes. 

Risk Assessment is the key component in running your business, being able to manage your risk is a crucial; skill-set that business owners must have in order to run a successful company

The second basis is your direct competitors. This can provide an important reality check. Having a revenue growth of 10 percent annually may sound good, but if competitors are growing at 25 percent, it highlights under performance.

The final basis consists of contractual covenants. Lenders, investors and key customers usually require certain financial performance benchmarks. Maintaining key financial ratios and data points within predetermined limits can help these third parties protect their interests.

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