Financial analysis is the basis of evaluating your company’s business performance. It involves a comparison of data, typically financial data. The aim of any financial analysis is to use that comparison and interpretation of financial data to gain insights into how a business is performing, to identify areas for improvement or refinement. Below are some of the benefits that a simple financial analysis can bring to your business:
- One of the major benefits of financial analysis is that it promotes the use of a uniform methodology by which we can compare changes in a company’s operations over time.
- It helps answer some key questions; for example,
- Why is one business more profitable than another?
- Why is one business less profitable than another?
- What kind of returns are being earned by the shareholders from their investment in the business or by a business as it invests in its projects?
- How solvent is a business?
- Is it able to pay its debts when they become due?
- How well does it manage its assets, particular its working capital such as inventories, debtors and creditors etc.
A financial analysis helps answer all of these questions. Its’ job isn’t necessarily formulating solutions to those questions
- Financial analysis allows us to evaluate the business performance of a company, its liquidity, both short and long-term and its operating efficiency.
- Financial analysis allows us to measure changes of a department’s performance against another or indeed the performance of one company to another or compare the performance of a company to an industry benchmark.
- There are approximately 50 popular accounting ratios used to analyse financial statements. However, it is important to note that we should never judge a company’s ratio performance by simply viewing one ratio in isolation. We should always endeavour to compare the results with prior periods to establish trends and always compare companies in the same industry sector.
- Financial or ratio analysis is not intended to be the sole process by which we judge companies. Rather it is used to supplement our analysis of a company’s business: what it is and what it does and then its performance.
- Financial analysis is important to other stakeholders too. For instance:
- Shareholders definitely want to make sure that the business is being run efficiently and that the capital tied up in the business is minimised;
- Lenders and creditors are interested in how the working capital of a business is managed;
- A lender like a bank would look very closely at the liquidity position of a business to make sure that the business is able to pay the interest and the amounts the capital amounts owed on a bank loan; and
- Competitors will be interested to see whether a competing business is able to manage its assets more effectively because that could be a source of competitive advantage over them.
A true financial analysis can be performed when your books of accounts, income statement and balance sheet present the true picture of your finances. If the accounts are incomplete or inaccurate, you will not be able to assess your company’s performance properly. Hence, it is imperative to engage professional accounting services in Singapore to manage your company’s finances.