Financial Analysis

Financial Analysis Financial analysis is an aspect of the overall business finance function that involves examining historical data to gain information about the current and future financial health of a company. Financial analysis can be applied in a wide variety of situations to give business managers the information they need to make critical decisions. Financial analysis is useful and significant to different users in the following ways Finance manager: Financial analysis focuses on the facts and relationships related to managerial performance corporate efficiency financial strengths and weaknesses and creditworthiness of the company. A finance manager must be well-equipped with the different tools of analysis to make rational decisions for the firm. The tools for analysis help in studying accounting data so as to determine the continuity of the operating policies investment value of the business credit ratings and testing the efficiency of operations. The techniques are equally important in the area of financial control enabling the finance manager to make constant reviews of the actual financial operations of the firm to analyse the causes of major deviations which may help in corrective action wherever indicated. Top management: The importance of financial analysis is not limited to the finance manager alone. Its scope of importance is quite broad which includes top management in general and the other functional managers. Trade creditors: A trade creditor through an analysis of financial statements appraises not only the urgent ability of the company to meet its obligations but also judges the probability of its continued ability to meet all its financial obligations in future. Trade creditors are particularly interested in the firm's ability to meet their claims over a very short period of time. Their analysis will therefore confine to the evaluation of the firm's liquidity position. Lenders: Suppliers of long-term debt are concerned with the firm's long term solvency and survival. They analyse the firm's profitability overtime its ability to generate cash to be able to pay interest and repay the principal and the relationship between various sources of funds (capital structure relationships). Long-term tenders do analyse the historical financial statements. But they place more emphasis on the firm's projected financial statements to make analysis about its future solvency and profitability. Investors: Investors who have invested their money in the firm's shares are interested about the firm's earnings. As such they concentrate on the analysis of the firm's present and future profitability. They are also interested in the firm's capital structure to ascertain its influences on firm's earning and risk. They also evaluate the efficiency of the management and determine whether a change is needed or not. However in some large companies the shareholders' interest is limited to decide whether to buy sell or hold the shares. Labour unions: Labour unions analyse the financial statements to assess whether it can presently afford a wage increase and whether it can absorb a wage increase through increased productivity or by raising the prices. Others: The economists researchers etc. analyse the financial statements to study the present business and economic conditions. The government agencies need it for price regulations taxation and other similar purposes.