Financial statement analysis has long been a part of how businesses assess the financial health of their organization. It can help to spot potential problems and allow for better financial predictions, as well as help a company compare their financial standing and performance to industry competitors. Business financial analysis is essential to helping create better business plans and allow for more data-driven, insightful decision making for future prosperity.
How has financial analysis changed for businesses?
As technology, generations in the workplace, and the economy have changed, so have the approaches to financial analysis. Here is an overview of the traditional approach of financial analysis, as well as the aspects of the modern approach.
Most financial accounting experts agree that the traditional approach to business financial analysis is comprised of several main things. The first is a management of resources. Most financial statement analysis is done to understand the company’s strengths and weaknesses and used to make decisions that will increase overall profitability and create additional revenue for owners and shareholders. This is typically achieved by studying the profit and loss statement (or income statement) and the balance sheet for a period of time.
Another part of the traditional perspective to financial analysis is limiting the amount of risk that a company is exposed to – though what exactly constitutes risk varies from business to business.
One of the biggest technology advancements that has diversified the modern financial analysis approach is an abundance of accessible data. With more publicly traded companies and the internet enabling companies to reach customers all over the globe, there are both more companies than their ever have been and more information about these companies. This available data gives companies a benchmark to measure against and allows them to conduct more competitive analysis when looking at financial statements. Trend and industry financial analysis give businesses an ability to focus on their performance against a competitor or see their impact in the industry at large. With this approach, they are able to identify other factors besides sales and revenue that may be impacting their industry position and address any performance gaps.
Additionally, this spread of information and global connectivity of business communities means two things: more small startups are popping up all over the globe and larger, more established businesses are often looking at financial statements from a perspective of being able to acquire nimble, popular startup brands. This means approaching financial statements not just examining profits and losses, but also more closely analyze the business from a cash-flow perspective, a debt to revenue perspective, and a position-to-invest viewpoint.
While modern financial analysis still works with income statements and balance sheets, they also typically include other factors such as cash flow statement, funds flow statement, and include ratio analysis to help better understand things like a company’s liquidity. Modern financial analysis is much more outward facing and concerned with diversifying the ways an organization might secure their future prosperity.
The financial health of a business can be measured by many things, but it the overall financial position can be crucial to the overall future of the business and foundational in making modifications or decisions that will grow or change the business. While technology may have brought about different financial analysis tools or prompted businesses to examine different areas of emphasis in their financial reporting, the purpose because financial statement analysis remains including to help spot discrepancies and potential problems and be a first step towards solving them to create a more solid, enduring financial foundation.