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What is a financial analysis and why is it important?

The maintenance of a company or business, is based on a large set of elements, among which is the financial analysis, so if you own a business, microenterprise, venture or company, it is very important that you stay reading to know what is a financial analysis and why it is important.

Although it is not the main element of the company, it can be what gives the right information about the situation of the business, so know the advantages of financial analysis in addition to the characteristics that define it and the use that professionals give it.

What is a financial analysis and why is it important
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What is a financial analysis?

When we talk about financial analysis, we refer to the study made by professionals (analysts) of a company’s accounting information. This analysis allows the interested parties to know the economic situation of the company.

To better understand what a financial analysis is, it is good to know how it is performed.

Making a financial analysis is not a matter of taking a few data from the company’s accounting book and making a report on it. To create a good financial analysis it is necessary to take into account the reasons for the analysis and what you are looking for with it.

The evaluations that are made in a correct and adequate financial analysis of a company are the following:

  • Company profitability: This is the company's capacity to obtain income and maintain growth in the short, medium and long term. This information is obtained through the financial analysis of the income statement, where the results of business operations are found.
  • Solvency of the company: This is the company's capacity to pay debts to third parties and meet its obligations to long-term creditors. This information can be obtained from the company's balance sheet at the time of the financial analysis.
  • Company liquidity: Like solvency, it can be obtained by analyzing the company's balance sheet and refers to the company's ability to maintain a constant and positive cash flow while meeting immediate obligations.
  • Company stability: As its name indicates, this is the company's ability to maintain a long-term equilibrium within the niche, with good liquidity and solvency, without incurring serious long-term losses.

These could be taken as the characteristics of financial analysis, since they are the basis for obtaining a good financial analysis of a company.

Similarly, there are types of financial analysis based on different factors and information.

Woman doing financial analysis at office
Business analysis idea concept.

Types of financial analysis:

Depending on the information to which it applies:

  • Vertical methods
  • Horizontal Methods
  • Factor analysis

According to the information it handles:

  • Statistical methods
  • Dynamic methods
  • Combined methods

According to the source of information being compared:

  • Internal analysis
  • External analysis

According to the frequency of use:

  • Traditional methods
  • Advanced methods.

By following any of the methods and types of financial analysis you can perform the steps for a useful financial analysis and find only the desired information. Normally in the financial analysis PDF files you will find different practical examples of financial analysis of a company, in order to quickly explain their usefulness and importance.

Why is financial analysis important?

Knowing if your company will have a future or not, if it is losing a lot or a little money, if the profitability is still adequate or if it can remain a competition for the rest of the companies within the same niche, is information that can be obtained through financial analysis.

So why is financial analysis important? The financial analysis of a company allows you to know if it is worth continuing with it or not, to know how close or far you are from the probability of bankruptcy and to obtain the necessary data to create new and future work plans.

The importance of financial analysis lies mostly in being able to make the right decisions before reaching critical points that can lead the company into a tailspin and cause the loss of the company and with it a great loss of money and investors.

Getting a bad diagnosis in time, is better than not getting any information about the state of your company and only a financial analysis allows you to do that. In addition, financial analysis offers a lot of advantages for the company that uses it correctly, let’s see the advantages of financial analysis.

Advantages of financial analysis

Having important data about your company or your competitor’s company will always be an excellent advantage in the market. In addition to this, having a financial analysis brings a series of advantages that we will mention below:

Increases the level of competitiveness of the company:

This refers to the fact that by performing a financial analysis, strategies can be created to improve over time and thus create greater competition with other companies.

Increased productivity:

With the information provided by a company's financial analysis, it is possible to know how, where and when to make new arrangements to increase productivity.

Increases company communication:

Normally a company has different departments that work in isolation. The financial analysis of a company gives them all the information to unite a great team and work towards success.

Minimizes the margin of error:

The financial department of a company bases all its management on financial analysis, and by performing it correctly, they ensure that there are no serious errors in the long term.

Positioning of the company:

A good financial analysis ensures that your company remains at the top of productivity, importance and quality compared to those who do not make use of this important tool.

Performing a financial analysis can give you all the tools you need to put your company on top, take care of wellbeing and productivity, as well as comply with third parties correctly and make constant improvements.

Advantages of financial analysis

References

Wikipedia

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