Financial Analysis tools and techniques

Financial Analysis is defined as being the process of identifying financial strength and weakness of a business by establishing relationship between the elements of balance sheet and income statement. The information pertaining to the financial statements is of great importance through which interpretation and analysis is made. It is through the process of financial analysis that the key performance indicators, such as, liquidity solvency, profitability as well as the efficiency of operations of a business entity may be ascertained, while short term and long term prospects of a business may be evaluated. Thus, identifying the weakness, the intent is to arrive at recommendations as well as forecasts for the future of a business entity.

Financial analysis focuses on the financial statements, as they are a disclosure of a financial performance of a business entity. “A Financial Statement is an organized collection of data according to logical and consistent accounting procedures. Its purpose is to convey an understanding of some financial aspects of a business firm. It may show assets position at amoment of time as in the case of balance sheet, or may reveal a series of activities over a given period of times, as in the case of an income statement.”

Since there is recurring need to evaluate the past performance, present financial position, the position of liquidity and to assist in forecasting the future prospects of the organization, various financial statements are to be examined in order that the forecast on the earnings may be made and the progress of the company be ascertained.

The financial statements are: Income statement, balance sheet, statement of earnings, statement of changes in financial position and the cash flow statement. The income statement, having been termed as profit and loss account is the most useful financial statement to enlighten what has happened to the business between the specified time intervals while showing, revenues, expenses gains and losses. Balance sheet is a statement which shows the financial position of a business at certain point of time. The distinction between income statement and the balance sheet is that the former is for a period and the latter indicates the financial position on a particular date. However, on the basis of financial statements, the objective of financial analysis is to draw information to facilitate decision making, to evaluate the strength and the weakness of a business, to determine the earning capacity, to provide insights on liquidity, solvency and profitability and to decide the future prospects of a business entity.

There are various types of Financial analysis. They are briefly mentioned herein:

External analysis: The external analysis is done on the basis of published financial statements by those who do not have access to the accounting information, such as, stock holders, banks, creditors, and the general public.

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Written by:

K. A. Fareed (Fareed Siddiqui)
Writer, Trainer, Author, Blogger, Software Developer
BBA, MBA-Finance, MPhil-Financial Management, (MSc-Software Engineering)
(PhD-Management)
MA-English, MPhil-English
Post Graduate Diploma in Computer Applications and Programming
Certificate course in English language proficiency
Level 1 – Leadership and Management ILM – UK
Pursuing CMA-USA
Individual Member of Institute of Management Consultants of India

Professional articles on business and Management 

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