Is financial analysis is a major tool to analyze your business?
It is never easy to judge your financial position by merely look at values on financial statements
. It is very necessary for you, to give attention on, what your financial statements are screaming to you. In these volatile economic and financial conditions, this is mandatory for entrepreneurs to have in depth knowledge of their financial health. This knowledge can be gettable for entrepreneurs by doing financial analysis of their financial statements.
Financial analysis helps entrepreneurs to identify most crucial relationship between your companys operational information and financial information. The goal of the analysis is to examine your firms financial health and its place in the market. The most common tools of financial analysis are: Ratio analysis and percentage analysis. Both sets have different uses and roles. We use them according to the need and the information available. Some times we required particular information and only one can be useful to provide that, so we use them according to the requirement of data we need to analyse.
In percentage analysis, we evaluate different accounts of a statement by setting one account as a base percentage and then compare them with different years to evaluate our companys performance. It provides overall picture of the performance and also gives closer look of relationship between different elements of the statements. It is mostly beneficial to improve day to day operations and to improve short term management of the business. You can also compare your percentages with industry percentages or standards.
The other method is ratio analysis, it evaluate relationship between different elements of the financial statements. There are four ratios commonly used in ratio analysis: Operational ratios, liquidity ratios, efficiency ratios and profitability ratios.
Liquidity ratios basically to find your short and long term debt paying ability against the assets. A profitability ratio tells you the return you earned compare to the sales and investment. Operational ratio measures efficiency of different operations of the business, such as, inventory, payables, and receivables. An efficiency ratio tells us the efficiency of the management, how efficient is your management to utilize business assets, in order to attain maximum return.
These days analysis are not a difficult task, by the help of online service or software you can do it perfectly and cheaply. But the significance of these analyses is very much clear in these tough economic conditions.
Is financial analysis is a major tool to analyze your business?
By: Ayaz Haider
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