Financial analysis is one of the core functions that a company must perform to ensure the stability of its business. Having said that, financial analysis occurs by examining the flow of company finances. The accounting of company finances is a prerequisite to producing financial data needed for analysis. Therefore, accountants are at the core of this task as well, and with the “new normal” environment created by COVID-19, all the more that their role becomes essential in the conduct of financial analysis.
See our previous article on How Accountants Fit in the New Normal
After accountants produce the financial data, what then does top management do with the information? Can they easily decipher and translate the information from the accountants and use those for decision making? Learn more about the different methods of conducting financial analysis.
Introduction to financial analysis
All top management and company governance executives have a background in the language of business, which is accounting. However, accountants produce data that are sometimes too broad or all-encompassing to be immediately useful. Most managers prefer dealing with “sifted” data that are ready for decision making. These are figures that immediately make sense without having to read through numerous spreadsheets and pages of financial statements.
Financial analysis is the process of evaluating the business as a whole, projects to be done and accomplished, budgets and their constraints, and other finance-related intricacies to gauge the company’s performance and appropriateness.
The process itself uses financial ratios, financial statements, values of securities, etc., to ascertain whether the company is doing well enough in the present. Financial analysts and other users of financial data primarily use Excel and other spreadsheets to analyze historical data and make projections, to carry out the different types of financial analysis.
Purpose of financial analysis
Usually, financial analysis is used to analyze whether an entity is stable, solvent, liquid, or profitable enough to be a worthwhile investment, if conducted externally. If conducted internally, financial analysis can aid managers in decision-making for the present, past, and future endeavors of the company. These endeavors are not necessarily financial in nature because the results of financial analysis can affect all aspects of the business and its operations.