How to do financial statement analysis?
June 10, 2021
The detailed information about the money invested and earned by a business can only be obtained through financial statements. In this article, we have covered the inferences for getting a financial statement analysis for the smooth conduct of a business.
What Are Financial Statements?
Financial statements are written records that depict the overall financial performance of a business entity. This statement is utilized by professionals from governmental agencies, investors or market analysts to determine the financial capability of a company. Moreover, one can also perform an analysis of the overall profits of a company through these statements. A financial statement consists of these three types of statements:
- Balance Sheet
- Profit and Loss statement
- Cash flow statement
Apart from this, financial statement is used by government and tax agencies for auditing and to perform checks related to tax and other financial purposes.
Reasons To Get Financial Statements Analysis
Getting the financial statement analysis from a reputed firm can help your company prosper. A financial statement can help you to identify the weak points and strengths of your firm. Thus in return, you can work on them to ensure that your business runs smoothly. Here are a few more benefits of getting a financial statement analysis:
- Determine your firm's capacity to pay back debts.
- Determine your company's potential sources of income and profit margins
- Review the financial ratios of your business to find out the financial condition of a company
- Keep a check on the business transactions of your company through financial statements
- Manage your working capital cycle (inventory days, debtor days, creditor days)
As a finance expert, one needs to have detailed knowledge about three main areas before undertaking financial statement analysis.
- The layout of a financial statement
- Economic features of the industry in which the business functions
- Accounting policies followed by the company
Here are some of the steps undertaken while performing an efficient financial statement analysis.
How To Perform Financial Statement Analysis
- Identifying the industry economic attributes - The first step is to evaluate the industry's value chain in which the business is operating. These activities mainly include essential steps such as the production and distribution of the outcomes/services offered by the company. The method of porter's five forces is very effective for evaluating the competition in an industry.
- Recognising the techniques used by the business - The second step is to discern the types of products/services that the firm has to offer. It includes various aspects such as the distinct qualities of the outcome, profitability, marketing strategies that have been implemented, including cost-effectiveness. On top of that, one can also note the other factors such as industry diversification, geographical factors etc.
- Evaluating the quality of the financial statements - The financial statement analysis must be done keeping in mind the current accounting standards. When it comes to analysing a balance sheet, one must keep it in mind if the statement depicts the company's overall financial position. On the other hand, an income statement must depict the sources of income of a firm accurately. Lastly, assessing a cash flow statement must help understand the investments and financial activities undertaken by a business.
- Analysing the profit margin and risks associated - It is one of the most crucial steps of analysing a financial statement because it adds value. In this step, financial statement ratios are most commonly used to identify the economic situation. Besides this, the profits are evaluated under two categories, i.e. profitability in terms of the operations of a firm and terms of its shareholders.
- Predicting the financial statement - Different strategies are put into use while forecasting a firm's financial situation in terms of cash flows and alternate funding sources.
The performance of a firm can be evaluated by its financial statements. It must be well framed according to the current business needs. Therefore, it is vital to trust professionals when it comes to getting your financial statement analysis. Make Resurgent India your most preferred choice for keeping the finances of your business on track. To gain more insights about the leading investment bank of India, visit the website.