The Importance of Financial Analysis in Business Decision-Making
Introduction to Financial Analysis
Those running accounting practices will be familiar with the process of financial analysis under which statements and other important data will be examined to assess the actual status of an organisation. While doing financial analysis, you will be going through your client’s income statements, cash flow statements, and balance sheets.
By going through these important documents, you will see its profitability, liquidity, and solvency—in short, its actual financial position. The analysis you make using multiple tools will help you give valuable business insights to your clients, thus helping them make informed business decisions and tackle problems in advance by improving performance.
What is Financial Ratio Analysis and its top techniques
Financial ratio analysis is a technique where items of one statement are compared with another. It is done in order to make fair comparisons across time and between different companies or industries. It is important to note that financial ratios can be accurate only when the financial statements are prepared as per the same accounting standards.
The main types of financial ratio analysis are:
- Liquidity
- Coverage
- Solvency
- Profitability
- Efficiency
- Market prospects
Plus, there are certain techniques of financial ratio analysis, which are:
- Vertical Analysis
- Profitability Analysis
- Leverage Analysis
- Growth Analysis
- Liquidity Analysis
- Solvency Analysis
- Horizontal Analysis
- Cash Flow Analysis
- Rates of Return Analysis
- Valuation Analysis
- Scenario and Sensitivity Analysis
- Variance Analysis
- Trend Analysis
- Turnover Ratio Analysis
- Coverage Analysis
Importance of Financial Analysis
Financial analysis can help you highlight your client’s financial strengths and weaknesses and advise them so that they can make informed decisions or provide input for their future plans. Such is the importance of economic analysis, which investors, lenders, and creditors will always consider when making investment decisions.
Tools used can bring in data from all over the clients’ systems so that your clients can have a complete view of their business. This helps save your and your clients’ time and helps them gain broader insights to predict and improve their performance.
Challenges in Financial Analysis
There are specific challenges when it comes to doing financial analysis for your clients. These challenges are as follows:
Dependence on Old Data
Financial analysis is usually based on the data provided by your clients, which is usually old. Based on that, making future predictions can be a little tricky. In today’s fast-paced business environment, you will require real-time data from your clients so that impactful and futuristic decisions can be made.
Big Investments Will Be Required
It will require you to invest considerably in hardware and data engineers to integrate, store and manage your data.
Incomplete View
It is entirely based on statements provided by your clients. It does not take into consideration the industry trends, regulatory updates by HMRC or Companies House, industry standards, regulatory issues and your client’s management capabilities.
Data Inaccuracy
Many of your clients may not have complete automation in place, and they will rely on gathering data manually. This increases the possibility of manipulation or accidental errors in data, which in turn will result in inaccuracies. Such inaccuracy will break the trust of investors and lead to a loss of reputation for your clients and your accounting practice.
The only way to tackle these challenges effectively is by investing in financial analysis software. However, investing in it and training your accountants on it will be time-consuming and costly. In that case, you can avail yourself of accounting outsourcing services from service providers that use this software on a daily basis.
Advantages of Financial Analysis Software
Many businesses and financial analysts still manually analyze data, which might surprise you. This usually creates problems and challenges. However, you can overcome it by using this software.
Incorporate this software into your work to gain the following benefits:
- You will have more time to analyse and scrutinise the data because data gathering is automated and fast.
- You can highlight important and complex business insights by using interactive visualisation, leveraging AI recommendations, and even building machine learning models using automated machine learning (AutoML).
- The data gathered is trustworthy because you can track its integrity.
- The data you will be getting is real-time; hence, you can immediately alert other applications if you find any glaring errors.
Conclusion
Financial analysis is important and must be conducted at all costs so that your clients are aware of their actual status and take corrective action if required. But its importance does not end there; even your stakeholders and investors attach equal importance to it. The aim of this blog is to simplify the complex aspects so that you can understand it better. Agreed, you may still find it complex even after investing in training your accountants in new tools and technologies. In that case, you can take the help of accounting outsourcing services offered by service providers such as Corient Business Solutions. Our highly trained accountants expertly handle the tricky aspects using multiple tools. To understand more about our work ethos and our accounting services, please visit our website. Also, do contact us via contact form, one of executives will get in touch with you.