Table of Contents
What is Financial Analytics?
The financial analysis consists of a sequence of techniques and events (such as studies of financial ratios, indicators and others) that allow the company accounting information to analyzes to obtain an objective view of its current situation and how it is expected to evolve in the future.
Purpose of Financial Analysis
The impartial financial analytics is to get a study that lets the economic agents interested in relate to the organization makes the best decisions.
Financial analysis will depend on the location or perspective of the economic agent in question. Considering the above, we can divide the go-betweens into two groups:
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Internal: The company’s administrators use financial analysis to improve the firm’s managed, correct imbalances, prevent risks or take advantage of opportunities. Good financial accounting is a key to planning, correcting and managing.
External: External agents use financial analysis to know the current situation of the company and its likely future trend. Thus, for example, for an investor, it is crucial to know the state of a company to see if it is worth investing in it or not. Other relevant outside agents are customers, suppliers, potential investors, regulators, tax authorities, etc.
How Financial Analysis is Performed?
The financial analysis is carried out finished the observation of the company’s accounting data (mainly financial statements of a particular period), ratios, indices and other indicators, together with additional information related primarily to the economic and competitive context in which the company operates. Organization.
Three basic concepts should be reported:
Profitability: Accounts related to income, costs and results are observed. It is about determining not only the company’s value but also its composition, quality, evolution and projection.
Liquidity: That is, the aptitude to meet your reserve needs and meet your short-term debts. Here variables are observed, such as indebtedness, current assets, maturity period, rotation, etc.
Solvency: Refers to your ability to meet long-term arrears and also be able to invest in growth in the future. In this case, we detect variables such as long-term debt, equity, sources of financing, etc.
Financial Analysis Methods
There are two methods according to how the analysis structure:
Vertical: The financial statements of a single period analyze.
Horizontal: The financial statements of more than one period or more than one company are studied.
Accounting as the Basis of Financial Analysis.
The company’s accounting is the basis of the financial analysis since it is from it that the information that analyzes, compared, and measured is taken. And also, It hence important of keeping a correct accounting, which reflects the economic reality. And company finances.
Financial analysis is what allows accounting to be practical when making decisions; since accounting. And also, if not read correctly, does not say anything and even less so for a manager who knows little about accounting, then the financial analysis is essential for accounting to fulfil the most critical objective for which it was designed: to serve as a basis for decision-making.
How to do a Financial Analysis?
Financial analysis is a process that involves the use of economic indicators that help measure and understand specific aspects of the company’s financial structure.
A large number of indicators and financial analytics ratios allow a complete and exhaustive analysis of a company, which address in more detail in the following article.
Related topics:
- horizontal analysis
- vertical analysis
- Cash flow analysis
- Financial specimens
- Profitability indicators.
Objectives of Financial Analysis
If you want to distinguish more about what financial analysis is and what it is for, you should read its objectives below.
The agents in charge of deciphering the result of a company’s financial statements are the ones who make the best decisions according to the organization’s forecast, which means that, according to result obtain in the economic analysis. And also, it will decides what to do with the financial direction of the company, to avoid losses or bankruptcy.
Who is the Financial Analysis of a Company For?
Given its advantages, different agents may interest in knowing the results of the economic-financial analysis of the company. And also, Among them are the company’s financial, accounting, administration or management control departments. And it is that this report will help them understand, measure and evaluate the situation, carry out commands and monitoring, and use it as a basis for planning, budgeting or making other projections for the future, etc.
On the other hand, this analysis must be mandatory knowledge of the company’s management and, if possible, of the commercial and sales departments.
The Keys to Analyzing a Company’s Finances
Carrying out an financial analytics of the finances of a company has a series of benefits that must into account. And also, These advantages make this type of document key to the proper functioning of a company. Among the different gifts, we can highlight the following:
Enables business diagnostics.
- It helps to understand an entity’s current and previous situation from the available data.
- It provides a basis for internal or third-party decision-making regarding the company.
- It allows us to appreciate the temporal evolution of the analyzed entity.
- It facilitates the monitoring and control of a company.
- It enables the analysis of the viability of the company and comparison with other entities or sectors.
- It helps plan goals and make projections based on reliable data.
Most Used Analysis Techniques in Finance
There are different methods for carrying out the financial analysis of the company. However, the main techniques are vertical and horizontal. And also, Horizontal economic research methods (or trend analysis) compare a company’s accounting lines or concepts in different periods. On the other hand, vertical analysis technology focuses on measuring an item with the total to which it belongs or to another essential reference. And also, This usually indicates the composition of the items within the different financial statements chosen for the study.
Fundamentals of Financial Analysis
The source of financial analysis is the calculation of specific indicators, often in the form of ratios, characterizing one element of the company’s financial and economic activities. And also, Some of the best-known financial ratios list below:
Equity ratio, the relationship between equity and total capital (assets) of the company, and financial ratio (relationship between liabilities and support).
The current liquidity ratio is the ratio of existing assets to short-term liabilities.
A quick liquidity ratio is a ratio of liquid assets, including cash, short-term financial investments, and short-term accounts receivable, to short-term liabilities.
Return on equity through the relationship between the company’s net profit and equity.
Sales performance is a ratio of sales profit (gross profit) to company revenue and net profit margin (percentage of net profit to gain).
Conclusion
Financial analytics comprises a set of techniques used to diagnose the entity’s situation and prospects, using indicators, ratios and financial ratios. And also, As a result of quality analysis, the company can select among the different possibilities of action and act appropriately to the detected needs or established objectives. And also, On the other hand, it also makes future projections, using the present analysis data to foresee possible future scenarios. Thus, it is also a good instrument for managing financial risks.