Businesses and individuals alike require the use of financial statements. All income and expenditure need to be identified, traced from their sources, and shown how they affect positive or negative cash flow.
Analyzing income and expenditure means that they can then be factored into future decisions concerning further income and expenditure, and so on. The process of financial reporting and statement analysis ranges from relatively simple from a top-down perspective to extremely complex when drilling down to base levels.
At its most basic level, simple income vs. expenditure can be compared across multiple income sheets, outgoing statements, and cash flow reports, while further information pertaining to market ratios can be obtained.
What is Financial Statement Analysis
Balance, income, and cash flow need to be analyzed so that decisions can be made about how to use a business’s finances according to annual or long-term plans. Financial statements are typically analyzed by way of three different metrics; horizontal, vertical, and ratio.
- Horizontal analysis; depicts percentage change over multiple periods of time.
- Vertical analysis; depicts itemized expenditure amounts as percentages of total income.
- Ratio analysis; various comparison metric points for multiple companies in the same sector.
These metrics are all analyzed from various sources including balance sheets, income statements, and cash flow statements. By analyzing the data from all of these statements a good analyst can measure business value and performance using the key metrics as an important tool to highlight growth, income, and expenditure in a precise manner.
Why You Need Financial Statement Analysis
With financial statement analysis, you can use the mentioned balance sheets alongside multiple analysis techniques to help evaluate and assess your business’ performance and value across very specific criteria. This allows any potential investors, or existing ones to make informed decisions based on data concatenated across multiple financial statements via the various metric measurement techniques mentioned.
In addition, financial statement analysis helps with any monetary issues that can arise such as explaining fiduciary responsibilities to investors, potential investors, creditors, further analysts, and tax responsibility. The analyzed financial data can then be used to form a clear picture of exactly where your company stands from a solvency, liquidity, or profitability perspective.
Who Financial Statement Analysis Intended For
Essentially, financial statement analysis is intended for anyone involved in a fiduciary relationship across your business such as yourself, shareholders, investors (current and potential), accountants, and lawyers. In terms of financial analysis for your own purposes, you are able to obtain a clear and precise picture of the state of your company’s finances, avenues of income, and outgoing expenditure. All this information is also broken down into percentages of totals so that it can be digested and incorporated into any future business plans.
In addition to yourself, investors themselves, as well as company management and anyone else authorized to access company financial information, will benefit from financial statement analysis. Management can use financial reports as part of future operating procedures or impending changes while investors and accountants can use reports in relation to their own analysis prospects such as trend ratio and fund flow.