What are Disadvantages and Advantages of Financial Statement Analysis?

Financial modelling techniques

What are the disadvantages and advantages of financial statement analysis?

Companies choose different processes to be profitable, safely increasing their productivity. One of the safe ways is the analysis of financial statements, its use makes it easier to respond to possible problems. Using financial analysis in a company brings advantages that help the fulfilment of our business plan, such as better communication in the company and increased productivity.

Financial statements are true statements of the company's health. Financial documents and statements must be prepared and published on a yearly, quarterly, biannual, and monthly basis.

Financial statements include true statements of the company's operational budget, assets, expenses, liabilities, earnings, and the net worth of liabilities and assets. Financial analysts, accountants, and planners use these statements to enable decision-making expansions, future planning, fundraising, and market launches among others. However, there are bound to be some disadvantages too. Let us explore them.

Advantages of Financial Analysis 

  • Pattern Detection and forecasting: Financial statements have the ability to reveal earnings per year, sales and profits accrued. Though sales figures may vary, the financial planners will be in a position to find a correlative pattern over a few years of data of sales. Take the example of a company that may reveal a trend of sales increases whenever new products are marketed and released. Sales could drop after let's say a year of the product launch. This trend analysis is a huge company benefit as it forecasts a market life of about a year is useful, as it shows sales patterns for product launches, a sales drop after a year, and a need for new products in a year.

  • Budget Outline in real-time: Decision-making for planning the future, budget estimations, corrective actions required for efficient budgeting, and many such decisions rely heavily on financial statements. The statements reveal how much you can spend on marketing or product launches, strategizing for marketing campaigns, future expansions and requirements of funding. 

Disadvantages of Financial Analysis 

  • Based on patterns of the market: A big disadvantage of the financial statements analysis and use for making strategic decisions is based on figures and data on current market conditions which may fluctuate. Past performance is a good indicator and motivator. It cannot, however, guarantee the fluctuations and future demands. A cautious approach is called for in the interpretation of financial ratios and statements to prevent excessive risk-taking based purely on forecasts.

  • Analysis of At-One-Time basis: As the name suggests the forecast and analysis is applicable at that one time only. It does not reveal or compare the past performance or future forecast at one glance. One will need to exercise caution by generating and reporting continuously rather than on a one-time basis. Such extrapolation of data and financial analysis undertaken frequently is crucial to the company's health and decision-making abilities.

Why study financial analysis?

Consider taking a course on financial analysis so that you will understand financial statements better.

Course skills and requirements

A graduation degree or even a Master's in Finance goes a long way. Add relevant certifications. Those from a non-financial background can also take these courses as most offer boot camps to bring you to speed.

Course advantages: The course offers a good grasp of basics, concepts, theoretical knowledge, practical skills, and certifications that could help enhance your resume and career.

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