Skip to content Skip to sidebar Skip to footer

Fundamentals of financial analysis for small and medium businesses

What is the significance of financial analysis? Financial analysis is one of the financial tools that allow businesses to understand their current financial situation and assess their ability to achieve future financial goals. What exactly is financial ratio analysis? This is what we will cover in this article.

basics of financial analysis

What is meant by financial analysis?

It means the study of financial numbers and data related to the company’s activity, and through this analysis, the reasons for the improvement or decline in the company’s financial performance are determined over a specific period of time.

 It also includes studying the company’s future financial expectations and analyzing its ability to bear financial risks. It is also used to determine the strength and weakness of the company and its ability to achieve profits.

Financial analysis consists of several components, the most important of which are:

 Horizontal analysis

Horizontal analysis is used to compare a company’s financial results over different periods of time.

 vertical analysis

 Vertical analysis is used to compare a company’s financial results with that of its competitors in the market.

The financial analysis also includes the following:

proportional analysis

 Ratio analysis is used to analyze the relationships between the different financial elements in the final accounts statements

Critical analysis

Critical financial analysis is used to determine the availability of a company’s liquidity and its ability to meet its financial obligations.

Financial analysis is also an important tool used by service providers’ financial advisory, It analyzes the company’s financial statements and evaluates its financial and economic performance.

The company can use this analysis to determine how well it has met its objectives and whether it needs to change its financial strategies to improve its performance.

The importance of financial analysis for small and medium companies

Small and medium-sized businesses specializing in business, financial services, industrial, and other sectors are the economic backbone.

It accounts for more than 90% of all companies in the world, and in order to improve its performance, it must analyze its financial business results and measure its performance in terms of profitability, liquidity, and debt.

When is the financial analysis done?

When a company’s fiscal year ends, financial statements such as income, balance sheet, and cash flow are frequently examined.

Small and medium-sized businesses require financial analysis to determine their performance and the extent to which they meet their financial objectives.

It is typically performed when a company needs to issue financial statements or when it intends to expand or invest in new activities. It is also used when a company’s true value must be determined or when the main strengths and weaknesses of its financial performance must be identified.

How are financial statements analyzed?

Companies analyse financial statements, which include an income statement, balance sheet, and cash flows, using a variety of techniques such as financial ratio analysis and cash flow analysis.

To properly analyse financial statements, you must first:

Analysis of the main income statement 

Determine the total revenue and compare the growth rates between years.

To determine the profit margin, conduct a total cost of sales analysis.

To calculate the net profit, analyze general and administrative expenses.

Analysis of the main list of the financial position

Analysis of assets and confirmation that they are relevant to the company’s financial requirements.

Analyzing liabilities to ensure they are properly balanced between loans and equity.

Several financial indicators are used to analyze the financial statements, including:

Indicators of profitability include net profit, profit margin, and return on investment.

Indicators of liquidity: These include general and immediate liquidity, as well as the length of the monetary cycle.

The debt-to-equity ratio and the debt-to-working capital ratio are two debt indicators.

Corporate financial performance analysis tools

1- Financial statements: The financial statements, which include income, budget, and cash flow statements, provide information about the company’s financial performance.

2- Financial analyst reports: Financial analysts provide a comprehensive analysis of the company, and their recommendations can be relied on when making financial decisions.

3- Financial databases: Financial databases contain information on the financial performance of businesses.

What is financial ratio analysis?

Financial ratio analysis is a subset of financial performance analysis that entails calculating and analysing a set of financial ratios that demonstrate the relationship between numbers and the company’s basic financial data.

Liquidity, profitability, debt, and return ratios are examples of these ratios. Financial ratio analysis is used to evaluate a company’s competitiveness and to examine its financial performance and capital allocation.

Financial analysis can be an effective tool for setting and achieving financial goals. It provides you with a comprehensive view of the company’s or financial institution’s state, including assets, liabilities, revenues, and expenses, and assists you in making sound financial decisions.

Important concepts for analyzing corporate financial performance

Before beginning to analyse financial statements, officials in small and medium-sized businesses must understand some fundamental financial concepts, such as:

1- Gross income

It is the total amount that the company achieves from all the operations it performs.

2- Total expenses

 They are the amounts that the company spends on daily operations, investments, and others.

3- Net profits

It is the difference between total income and total expenses and is an important indicator of a company’s financial condition.

total expenses

The most important goals of financial analysis and how it can help you achieve your financial goals

Financial analysis is an important tool for any business because it helps to improve financial management operations and achieve future goals.

It has many important goals, the most important of which are:

  1. Financial performance evaluation

One of the most important goals of financial analysis is financial performance analysis. It aids in evaluating a company’s or financial institution’s financial performance by analysing revenues, expenses, profits, and losses.

When the extent of the losses is determined, the company can take the necessary steps to improve its financial performance and meet its objectives.

  1. Identify financial problems

 Financial analysis can help identify financial problems in a company or financial institution. When these problems are identified, the necessary actions can be taken to solve them and avoid potential risks.

  1. Provide accurate financial data

One of the primary goals of providing accurate and detailed financial data is financial performance analysis. It aids in the collection, analysis, and dissemination of data to financial institution members, partners, and shareholders.

By providing this information, correct financial decisions and financial goals can be met.

4- Making investment decisions

Financial analysis for small and medium-sized businesses assists in making sound investment decisions by analyzing financial statements and future projections.

In conclusion, financial analysis is one of the fundamental tools for evaluating and making sound financial decisions in business, as it provides us with a wealth of information that allows us to assess the strengths and weaknesses of companies and determine the steps necessary to improve financial performance. As a result, it is essential for all investors and business owners. Who aspires to achieve success and stability in business.

Leave a comment