Financial Analysis: Expert Guide & Best Tools

The importance of financial analysis is far-reaching for a business at any stage of its life. From external evaluations to internal analysis, the insights gleaned from performing these types of accounting and measures will greatly impact a business and its dealings.

You’re already aware of this. So, how can financial analysis be made easier? We’ll share all this and more in this expert guide on financial analysis.

Key Takeaways

• Financial analysis is the process of evaluating the financial performance, profitability, and value of a business or project, using various methods and techniques.
• Financial analysis can help you make better decisions, identify opportunities and risks, and communicate your results to stakeholders.
• Financial analysis can be challenging and time-consuming, especially when dealing with large and complex data sets, multiple sources and formats, and manual tasks and errors.
• Financial automation can help you simplify and streamline your financial analysis processes, by using tools like SolveXia that can collect, transform, and report data, as well as provide advanced analytics and insights.

Coming Up

1. What is Financial Analysis?

2. What are the Uses of Financial Analysis?

3. What are the Types of Financial Analysis?

4. What is a Financial Analysis Example?

5. Why is Financial Analysis Important?

6. How to Perform Financial Analysis?

7. What is Fundamental Analysis?

8. What is Technical Analysis?

9. What are the Best Financial Analysis Tools?

10. What are the Benefits of Data Analytics Software?

11. What is Real Time Analytics?

12. Closing Thoughts

What is Financial Analysis?

Financial analysis is the practice of evaluation businesses, budgets, and financially-impactful projects to determine whether or not they are sustainable and beneficial to the overall business.  

When performed within an organisation’s walls, the analysis is often used to help provide insights for decision-making and allow business leaders to review historical data and trends.  When conducted externally, financial analysis is utilised by investors to locate their best investment opportunities.

Financial analysis is performed using financial data and figures from important financial statements like the income statement, balance sheet, and cash flow statement. These are analysed to better understand how a business fares with respect to: profitability, stability, solvency, and liquidity.

What are the Uses of Financial Analysis?

In both corporate and investment settings, financial analysis is used. Let’s uncover the reasons behind why.

Corporate Finance Analysis

Within corporations, the accounting team is generally tasked with performing financial analysis. With the rise of automation tools like SolveXia,  most finance teams are undergoing finance transformation, whereby they are serving as strategic partners to executive teams.

As such, corporate finance analysis serves an important purpose, namely in providing valuable insights so leaders can be equipped with what they need to make the best business decisions. It’s also used to leverage historical data and trends in an effort to forecast the future.

Investment Analysis

Investment analysis occurs externally.  Through a top-down or bottom-up investment approach, analysts look at a company’s stocks and help to choose the companies with the most promise so investors can invest wisely.

What are the Types of Financial Analysis?

Financial analysis can be carried out in a variety of ways. No matter what type of method you choose to use or question you’re looking to answer, quality data will prove to be of utmost importance.

Using automation solutions like SolveXia will establish peace of mind as you will know that your data is complete and pulled from various sources, cleansed, and transformed for whatever type of analysis you need to perform.

We’ve compiled a look at some of the most commonly methods here:

Vertical Analysis

Vertical analysis takes components from the income statement and divides them by revenue to get a percentage. To transform these percentages into understandable information, it’s recommended to look at competitors within the same industry to see how the company is performing.

This type of analysis also makes it possible to easily compare different sized companies to one another by lining up their margins rather than dollars. For this reason, it’s also called a common-size income statement.

Horizontal Analysis

Horizontal analysis provides a look at growth rate by comparing historical financial data over several years. It makes it possible to find patterns and trends while telling whether or not the company is in growth or in decline.

For best measure, be sure to use a minimum of three years of past data and forecast five years into the future. SolveXia can aid in forecasts with predictive analysis.

Profitability Analysis

Analysts can measure the profitability ratio like gross margin, EBIT margin, net profit margin, and EBITDA margin to review how a company is performing.

Liquidity Analysis

With liquidity analysis, the balance sheet is the focal point and helps to understand how feasible it is for a company to meet their short-term obligations. Measures include: net working capital, cash ratio, current ratio, and acid test.

Efficiency Analysis

If you’re looking to understand how well your company takes care of its assets and leverages them for cash flow and revenue, then you can analyse your asset turnover ratio, fixed asset turnover ratio, and inventory turnover ratio, to name a few.

Variance Analysis

Financial automation software like SolveXia will assist in generating forecasts. To operate your business at maximum capacity, it’s important to conduct variance analysis, which shows how different your actual results are in comparison to forecasts and budgets. Once you have assessed variances, the next step is understanding why they occurred, regardless of whether they are working in your favor or not.

Leverage Analysis

Total debt is good to know, but it’s not as useful as knowing how debt stacks up against your equity. Debt/equity ratios can be calculated using ratios like debt/EBITDA and EBIT/interest.

Valuation Analysis

The question of knowing a business’ worth is all too common. Valuation analysis provides different ways to arrive at an estimation of a business’ worth. Some common approaches are:

• Intrinsic value - discounted cash flow analysis
• Relative value (market approach) - precedent transactions or comparable company analysis
• ‍Cost approach - the cost of built or replace

Scenario Analysis

All companies take on risk. Valuing a company involves risk because it looks into the future, which is, of course, unknown.

In order to assess what the future may be, you can perform sensitivity analysis and create scenarios to see how a company will fare under the best or worse case. Scenario and sensitivity analysis is used in both investment analysis and corporate finance analysis.

When performing any type of financial analysis, keep in mind these best practices:

• Organise your data meticulously (or allow an automation tool to do this for you)
• Use simple calculations
• Involve multiple team members in reviewing the work
• Present data visually with charts and graphs
• Don’t forget about the big picture when examining details closely

What is a Financial Analysis Example?

Your bottom line comes down to your revenue and expenses. To increase profits, you likely will try to reduce expenses. Expense analysis can be performed to see whether or not you are efficiently managing your money. It can also be used to estimate how expenses will rise or fall in the future.

The first thing you need for expense analysis is accurate and accessible data on where your money is being spent. At SolveXia, we helped a private equity firm solve its expense reduction problem. The firm couldn’t trust their analysis because of an antiquated access database and manual data manipulation (a high risk for manual error).

Once SolveXia was implemented, the firm was benefitting from full automation about one month later. WIth over 20 expense categories and more than 450 vendors, the firm could now easily review their expenses with confidence. Automating this process reduced the manual rework by 80%, and manual effort was only needed for a few hours rather than a whole day.

Why is Financial Analysis Important?

Our first words together was that the importance of financial analysis is far-reaching, and that’s the truth. Here’s a look at a few ways in which financial analysis proves to be of utmost importance, especially for CFOs.

Business Models

No matter what type of business you operate or industry you are in, it’s always necessary to keep your customers and clients happy. From B2B to B2C companies, financial analysis provides data and insights as to how your company is faring. This type of analysis can help you to pinpoint where to invest more, or what currently needs improvement so you can maximise your customers’ satisfaction.

Business Processes

To achieve operational effectiveness, your business processes must be streamlined. Financial analytics gives you a look at whatever KPIs you want to measure to deduce how your processes are running.

Finance Transformation

Finance departments are no longer only focused on bookkeeping and standard accounting procedures. Given the power of technology and automation, finance teams are able to get more done in less time. The time that has been freed is being spent on management and translating data into insights to aid in critical decision-making.

Integrated Analysis

Integrated analysis happens when data from disparate systems can be centralised into one location and used for robust evaluation. This results in increased accuracy and a deeper understanding of aspects like customer behaviour and asset valuation, to name a few.

When it comes to finance teams, financial analysis further aids in:

• Risk analytics
• Personalised services
• Consumer analytics
• Fraud detection
  

Across the board, these types of analysis will help you better invest your money, serve your customers, reduce risk, and maximise profits.

How to Perform Financial Analysis?

Financial analysis is typically executed by a data/financial analyst. They are tasked with completing a thorough review of the company’s financial statements.

Then, they calculate financial ratio analysis and make comparisons with other companies in the same industry or the same company’s historical performance. The past data plays an integral role in predicting the future.

Financial analysis was once a duty that required intense manual data entry and calculations on spreadsheets, but now it has become a simple task for automation software to manage.

What is Fundamental Analysis?

Fundamental analysis relies on ratios from data that can be extrapolated from the companies’ financial statements. These ratios, like the earnings per share (EPS) are used to determine the company’s value.

By reviewing ratio analysis and the external factors surrounding a business (i.e. financial and economic environment), analysts conclude the intrinsic value of a security. With that number, investors look at the current price of the security to determine whether it is overvalued or undervalued, thereby deciding whether or not to invest.

What is Technical Analysis?

Technical analysis looks at trading activity and is performed via statistical trends. With technical analysis, the analyst operates under the assumption that the security’s current price is reflective of all known information.

With this in mind, they focus on the pricing fluctuations and technical analysis will offer price trends. As opposed to the security’s fundamental attributes, this type of analysis is focused on movement and activity. By reviewing trends and patterns primarily on the security’s price and volume, analysts can estimate the direction of future prices.

What are the Best Financial Analysis Tools?

The far-reaching benefits of financial analysis tools mean that they are in high demand. As such, there exist options to choose from.

The following information is intended to help you select the tool that’s right for your needs.

Types of Financial Analysis Tools

Financial analysis tools exist on their own or as part of software that covers many uses. There are tools like SolveXia, which are process automation and data processing tools. SolveXia provides the ability to execute robotic process automation, data transformation, data analysis, report processing, account reconciliations, and more.

On the other hand, there are business analysis tools that solely focus on data manipulation and analysis, like Microsoft Excel. Or, you can find software that’s geared towards data visualisation, project management, or testing.

How to Choose the Best Tool?

When performing research to find the tool that will cover all your bases, it’s best to have a checklist in mind of features and factors that you’ll need to consider.

Choosing the right tool might take some time, but once you complete the task, you’ll be happy that you did because you will gain all that time and more back.

Here are some things to keep in mind:

• Get feedback: Involve your team in sourcing the kind of software you need. Since every department and individual is likely focused on a different aspect of the business, it’s best to know their pain points and desires so that you can potentially find a technological solution to address them all.

• Compare options: Once you have a list of needs, start to assess the marketplace and write down the various features and prices of the options. Then, you can compare them side-by-side to help narrow down the choices.
• Prioritise Needs: Since each tool will vary across the board, it’s helpful to know what features are absolutely mandatory and of greatest importance. To determine this, consider your overall business goals and see which factors directly affect said goals. Also, keep in mind the level of support that these vendors offer. For example, at SolveXia, we have a team available to assist at every step of the way, along with a long list of helpful resources.

• ‍Test: Remember that you don’t always have to commit to a product without getting to try it first. Most of these software solutions have an option to demo the product before buying it. This way, you can see that the tool will work for your needs.

What are the Benefits of Data Analytics Software?

Data analytics software will maximise your ability to make sound decisions in a timely manner. The benefits are immense and applicable to every department within your organisation.

With data analytics software, you can expect to achieve:

Increased efficiency

Data exists across departments, but each piece of data helps to inform the overall story and status of your business’ operations. By equipping every team member with valuable data, they can feel more empowered and educated to make decisions.

Upper level management will also have a clear view of how the business is operating. This translates into smoother operations and more timely actions, which will allow for increased employee and customer retention.

Lower costs

Data analysis lets you know where processes are working and where they need refinement. These insights can lead to cost-cutting measures.

Better business strategies

Data analytics software can show you if a process change will result in better or worse outcomes before having to implement wide scale and potentially cause irreversible damage.

Informed models

Data analysis software possesses the ability to review mass amounts of volume and provide reports that result in better business strategies. For example, you can set pricing models that maximise revenues by determining customers’ willingness to pay based on purchasing history and patterns.

What is Real Time Analytics?

Data analytics and automation software can also deliver real-time analytics. Like the name implies, real-time analytics means that you can use data immediately as it enters a database.

How Does Real-Time Analytics Work?

Real-time analytics works through a compilation of technological features, including:

Aggregator: pulls real-time analytics from different sources

‍Analytics engines: while performing analysis, the engine compares values of data

Broker: creates the availability of data

Stream processor: receiving and sends data and executes logic

Benefits of Real Time Analytics?

Real-time analytics will change how your business is run. You’ll benefit from having precise information at your fingertips that can be visually reviewed as data is changing. This can provide a competitive advantage because while other companies focus on the past and future, you can leverage real-time analytics to make the best decisions now.

Additionally, you can test changes on your business and immediately see the effects. This way, you can reduce risks.

As more data comes into the system, machine learning can be applied to learn itself and start making the optimal decisions for how to proceed in processes without human intervention. Thus, real-time analytics create an agile and informed organisation that operates with respect to the present moment so that results can be optimised for the future.

Closing Thoughts

Financial analysis is a main determinant of most business decisions. Rather than having to manually perform financial analysis, automation software can offer deep and timely insights that business leaders, stakeholders, and employees can use to take action and make decisions.

Automation tools like SolveXia are a cost-effective and transformative solution for businesses. It is especially designed to carry out finance functions so that your finance team can shift their focus to analytical tasks.