| The process of financial analysis |
It is almost impossible to tell financial health of your company just looking at financial statements. It is essential for today’s business owners have an in-depth understanding of their company’s financial position and performance due to volatile economic conditions as well as complex internal factors. To obtain that information main tool existing to business owners is financial analysis.
It is a process to develop critical relationships through company’s financial information. The objective is to analyze your company’s performance and financial position. To analyze the success, progress of your business and failure; we apply financial analysis to financial statements of the business. To analyze the business trends and compare these trends with other business in same industry or compare you performance with industry bench marks we do financial analysis. There two main methods of financial analysis: percentage analysis and ratio analysis.
1. Percentage analysis
The procedure of assess line items as a percentage of an exact account or a total is known as percentage analysis. Objectives are different for each set. We can get picture of overall performance through “percent of total”. If we need closer view of the elements and their relationships, “percent of an account” is the best available method. It is helpful in day-to-day operations and to improve short term management.
2. Ratio analysis
The second significant method is ratio analysis. It is best when you assess link between two or more accounts in your financial statements. There are four key categories of financial ratios: liquidity, profitability, efficiency and operational performance
• Liquidity or solvency ratios
Liquidity ratios uncover your company’s capability to meet its current and long term financial obligations with its assets.
• Profitability ratios
Profitability ratios calculate the profit earned by your company comparative to its sales and capital investment.
• Efficiency or productivity ratios
Efficiency ratios calculate how efficient management utilizes its assets in the course of generating sales.
• Operational ratios
Operational ratios study the efficiency of diverse operational functions inside your company
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Article Source: UnArchived Articles
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