Why Is Financial Analysis Important?

Financial Analysis

Financial analysis refers to the detailed process of evaluating a business, reports, budgets, ideas etc. to assess the feasibility of investing in the same, buying it, making informed decisions that align with organisational goals etc. It usually evaluates the same on four parameters, namely- liquidity, profitability, solvency, and stability. Thus, as important as it is to account for financial analysis, it is also important to interpret it and understand the relationship between different business components for enhanced financial analysis. A financial analysis course extends the knowledge to perform an in-depth analysis using various techniques such as vertical analysis, horizontal analysis, ratio analysis, trend analysis, interpreting cash flow statements and balance sheets, etc. In today's date, this practice has become all the more important as financial literacy, research and management are on the rise. To save money in a progressive trend, investment in assets, purchasing value investments, wealth creation, expansion of business, profitability with sustainability etc. a company needs to perform a financial analysis before making any decisions in this VUCA environment. Listed below are other reasons as to why taking a financial analysis course is paramount for the short term and long term interest of the firm:

● To assess the risk involved: No investment is rewarded without risk. No decision comes without impending peril. During a financial analysis, one can calculate the reward one reaps in proportion to the risk undertaken. It also helps companies in assessing their risk-taking capacity, calculate opportunity costs, and make choices accordingly.
● Comparative Analysis: Understanding and interpreting financial statements charts an easy path to compare between more than one avenues for investment, budgeting, forecasting and so on
● Health check of the financial performance of the firm: A microscopic view of the financial statements, annual reports, share prices, and market share of a firm can reveal it's stability to pay dividends to shareholders, profit retention, resource optimisation etc. that helps in making an informed decision
● Productive Efficiency: An in-depth look into the financial statements and reports of an organisation puts them in a better place to control any discrepancies in the operational and managerial capacity of the firm and take feedbacks or measures to ensure the removal of the same
● Relationship with stakeholders: While the financial communique of companies provides an idea to the employees in terms of their pay, monetary and non-monetary benefits; it gives knowledge to the existing and potential shareholders of dividends paid. Similarly, it informs the suppliers about the credit-worthiness of the firm and to the investors an understanding of the company's revenue-generating capacity and profit maximisation. Thus these statements provide an insight into the workings of the organisation to different stakeholders which determine a long-lasting relationship with various groups of stakeholders.
● Trend Spotting: By always staying informed about the inter-alia of a company through documentation of all its business decision via its annual reports, one is vigilant of the changes, trends, decision-making approaches of the company that helps in better financial planning and lucrative returns
● Macroeconomic and Microeconomic perspectives: The course of financial examinations of companies is such that it gives an extensive idea of not only what is happening within the company, but also a broad view of the competitors, the industry, and thus the economy. It amplifies the understanding of how everything is connected in the ecosystem due to which financial analysts and planners can vet decisions in terms of stable organisational finances and wealth management.
● Financial Planning: Due to the financial analysis course, companies are in a better place to decide, plan, and organise their wealth management portfolio, which aligns with short-term and long-term financial goals. It is a calculated prediction that brings stability, additional sources of revenue, and increased assets, and improved wealth creations.

Proper financial analysis, management, and planning benefits any organisation irrespective of their nature and size. It empowers them to make better management decisions, increase profitability, and achieve organisational goals in due course of time.

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