A company's financial position is closely linked to understanding its financial plans, which can only be uncovered through the steps of financial analysis. These steps involve analyzing the company's status and estimating its capabilities and potential. Financial analysis is essential for setting strategic plans, directing company policies, and shaping future plans based on the analysis results. The importance of financial analysis has grown with the rise of large corporations and industrial developments. However, challenges have emerged in monitoring business operations using accounting and statistical reports, making the proper application of financial analysis steps increasingly crucial.
What are the steps of financial analysis?
1. Classification:
This is a key step in financial analysis. It involves breaking down the financial statement figures through classification. In other words, it means segmenting a set of financial data into its components, then regrouping these components into homogeneous categories. This process facilitates smoother transition into the next stages of analysis.
2. Comparison:
The financial analyst compares the segmented figures by comparing specific groups to the total set. These comparisons help reveal the relationships among figures over different accounting periods. This method can also be applied across companies operating in the same sector for benchmarking purposes.
3. Conclusion:
After identifying the relationships among the figures, the analyst must understand the reasons behind them. This step involves drawing conclusions to resolve financial issues and making informed judgments about the company’s financial position. These insights are critical in assessing the company’s current and future capabilities.
Once the financial analysis steps are completed, one becomes ready to study the general balance sheet and track increases or decreases in financial ratios. This is done by comparing financial statements, fund flow reports, and forecasting ratios for both the near and long term. The goal is to highlight assets, competitiveness, and company capital at specific points in time or across multiple periods. This also helps track changes in budgets, profits, and losses, which in turn guide whether the company should increase or decrease its capital.
To learn more about financial analysis steps, the British Academy for Training and Development offers various training programs on financial strategy building, analysis of obstacles, and courses on general budgeting and financial reporting methods.