What is Financial Analysis? Types, Importance & Purpose.

. 6 min read
What is Financial Analysis? Types, Importance & Purpose.

Business is preparing balance sheets and counting assets and liabilities, but it goes through many analyses and reforms to make it more sound and stable. It reviews all the aspects of business operations and creates a critical report of the absolute financial position of your company or startup.

Many factors collectively become a financial analysis that includes the company's past performance, assessment of the current financial position, efficiency of business operations, accounting capital and solvency, and forms various types of analysis.

Meaning of Financial Analysis

The procedure of calculating a company's actual position through reviewing and analysing the financial statements to bring reforms and taking further future decisions is called Financial Analysis. It determines the strength and weaknesses of the enterprise and forms a deliberate understanding between the balance sheet and other financial statements.

It evaluates economic trends, makes sound financial policy, makes plans for long-term business projects, and plans future investments. It gives a conclusion by combining financial data and numbers. That's how it is vital for improving the health of a business and implementing good business strategies. Strategies provide growth to your company and become a leader in the market.

Types of Financial Analysis

two people working with the financial reports

1. Profitability Analysis: No business is without profits, and that's why a detailed profitable analysis is essential to make economic decisions to increase growth. A net ratio is set aside for company sales. Companies put a fixed percentage of profit margins for their new investments for business expansion. It helps in making a comparative study of competitive markets and assessing the firm's current financial position. It shows the profitable side of the company and its daily cash flow.

2. Liquidity Analysis: Every small business owner needs to maintain liquidity with increasing revenue. This analysis calculates the short-term insolvency of your business and shows the liquid capacity of converting your assets quickly into cash. It safeguards the business from unexpected short losses and generates steady cash flow. It also suggests that a company has adequate funds to meet daily business operations. It proposes the quick conversion of current assets into cash and makes certain payments timely to outsiders.

3. Technical Analysis: To make any investment decisions, companies need technical analysis to develop advanced business strategies. It has a two-way approach of research as a top-down and bottom-up approach. The top-down approach studies the macroeconomics of the current economy and then chooses independent securities for short-term gains. In contrast, the Bottom-down method examines the microeconomics and individual stocks for long-term trade purposes.

4. Fundamental Analysis: This financial analysis uses ratios to collect the data such as Earnings per share of the company to calculate the business market value. It gives a detailed view of the financial and economic conditions surrounding the company. It derives the intrinsic values of the company shares. The motive was to provide the correct figures to investors to compare the deals of shares as undervalued and overvalued.

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Importance of Financial Analysis

  1. It makes you financially literate about the complexities of operation and minute things of business. A good analysis provides you with the information in the simplest form, strategies wisely, and invests in long-term business plans.
  2. It contains different types of analysis of every characteristic of the business. It forms the relationship between the figures and financial statements of the company. It is vital to calculate past business outcomes, policies, and goals.
  3. It tells the nature of your company and all the strong and weak points of the firm. It suggests rectifying the errors in business policies and making necessary changes, resulting in growing profits year after year.
  4. It helps make investments in the right time frame for smooth financial activities and generate more revenues as companies require all sorts of short-term and long-term investments for growth.
  5. It reports all the receivable accounts which are liable to pay by the time. You can use accounting apps like OkCredit to generate credit reports and send timely reminders to make collections shortly.
  6. It facilitates efficient inventory management to keep track of fluency in cash flow for day-to-day business operations. It indicates the sufficiency of stock levels as inadequate or excess.

Purpose of Financial Analysis

  1. Its purpose is to create a strategic relationship between all financial statements and make suggestions accordingly to improve its business environment.
  2. It determines the worth of companies investment and the revenues it gathers from that. It helps to figure out the expenditures and cash flow.
  3. Its primary purpose is to improve future performance and move to a stable financial position. It helps in making long-term plans for constant growth for many years.
  4. It is helpful for the investors to gain correct information about the company's market position. The investor can make a reasonable perception of the ongoing business speed.
  5. It has a purpose to study the suitability of stocks, and debtors should vary by the company.
Hands of business people working in the office with documents


Now you know all about financial analysis and its types. It is of greater importance for the company and serves its purpose to provide consistent growth in its share prices.

You can ease your accounting tensions by using digital free apps to maintain all your data entries and manage your payments to make an excellent financial analysis. Apps like OkCredit provide a seamless accounting platform that is simple, paperless, and secure. You can access all your reports and account statements on any device anytime to make an analysis anywhere.

Get yourself free from all the paper mess and do all your data entries on OkCredit to save the environment and your valuable time. This app is 100% secure and safe and takes auto backup of your accounting data online and on your local computer. After the brief financial analysis, you can use OkCredit to set daily reminders to your debtors who are too lazy to pay on time and disturbs the company's day-to-day operation.

Also Read:

1) How To Calculate Long Term Capital Gains (LTCG)?
2) Financial Areas Businesswomen Should Focus On
3) What goes into starting a fintech company?
4) 10 Things Every Business Owner Can Learn About Money Management from Women

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Q. How to make a financial analysis report?

Ans. First of all, you need to maintain your accounting records properly and complete the data entries daily. If you cannot do that on time, you won't be able to make any analysis or form any strategy. Then you can hire an analyst from outside the company, or you can do it by yourself and improve your financial position.

Q. Are account statements essential for Financial Analysis?

Ans. Yes, it would be best to have all your account statements like balance sheets and profit and loss accounts. Without the correct data, you can not analyse and evaluate your financial resources and market value.

Q. Does it help in getting the potential investors?

Ans. Yes, it does, and you can get potential investors through a detailed financial analysis depicting every company's business activity. So make a good report on your company's financial health and move in with the big investors.

Q. Is financial analysis a complex process?

Ans. You might say that analysis needs the details of the complex data of business operations. But it is not impossible to do that by yourself as you can read the above points about financial analysis and create a report on your own. If you can do that, you can outsource through a professional analyst.