Financial Health Analysis

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If you are running a business for quite some time now, you must have known that you must constantly check on the financial health of your business; otherwise, the money, effort, and time you spent on it would be meaningless. You must see to it that the company is running well, there is an improvement to your operations, there is a constant and timely upgrade in your system, and you are confident that your business will get through to the inflation and deflation in the economy. These are just some things that you need to be aware of in your business. You must constantly examine the stand of your business for you to stay on top of the market. But how can you check whether your business is running well or not? What would be the basis for your analysis? In this article, we will discuss everything about the analysis of your financial health.

Additionally, presented in the next section are examples of financial health analysis.

Adidas AG Financial Health Analysis Example

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Financial Condition and Health Analysis Example

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Financial Health Analysis and Business Valuation Example

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What Is Financial Analysis?

This refers to the assessment of the viability, stability, and profitability of a business and the process of identifying financial strengths and weaknesses of the firm through a careful and systematic examination of the items in the balance sheet and income statement. It also pertains to the examination and assessment of a business from different perspectives to understand the overall stand or financial situation of the business.

Financial analysis is performed by professionals who prepare reports through the information taken from financial statements and other reports. The reports are then presented to the top management or any other key personnel for it to be used as a basis in making business decisions. The decisions may be about the things concerning the following:

You Are Considered Financially Healthy When You…

Elements Assessed in a Financial Analysis

There are certain areas in the financial statement that are focused in the assessment of its financial health. These areas are the usual items that would change in case of a change in the company’s operations. Knowing these would help the company know which areas are their weaknesses and which areas need improvements.

The elements to be assessed in a financial analysis are as follows:

Financial Health Analysis Sample Report Example

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Government Financial Health Analysis Example

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Hong Kong Corporations Financial Health Analysis Example

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Users of Financial Statement Analysis

There are a lot of people who need the information from the financial statement analysis for this may affect their decisions toward their dealings with the company. These users can be categorized as follows:

Types of Financial Statement Analysis

Horizontal and Vertical Analysis

Also referred to as trend analysis, horizontal analysis is the comparison of financial information over a series of reporting periods, allowing you to see how each item has changed in relationship to the changes in other items. Horizontal analysis is also referred to as trend analysis.

On the other hand, vertical analysis is the proportional analysis of a financial statement, where each line item on a financial statement is listed as a percentage of another item, in which typically, the sales item is 100% and all others are a certain percentage based on sales. Hence, vertical analysis is the review of the proportion of accounts to each other within a single period.

Ratio Analysis

Another method for analyzing financial statements is the use of many kinds of ratios to calculate the relative size of one number in relation to another and then compare it to the same ratio calculated for a prior period or those that are based on an industry average. This is to see if the company is performing in accordance with expectations.

Importance of Financial Statement Analysis

Decisions and Plans

Financial statement analysis is useful in making economic decision formulating plans and policies for the future. It is needed by the management of the company in order to evaluate its performance and effectiveness of their action to realize the company’s goal in the past.

Holding of Share

Moreover, financial statement analysis is also useful for shareholders in their decisions whether they have to continue with the holdings of the company’s share or sell them out.

Extension of Credit

In order to make decisions as to whether they would extend their loans to the company or demand for higher rates, the creditors would need the information provided through financial statement analysis.

Investment Decision

Current investors need the result of the financial statement analysis in order to make a decision to continue their investment in the company or remove their share from the company. This is also useful for prospective investors in their decision whether or not to invest their capital in the company’s share or not.

Problems with Financial Statement Analysis

There are several issues that you must be aware of that may interfere with your interpretation of the analysis results. These include but are not limited to the following:

Local Government Financial Health Analysis Example

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Nonprofit Financial Health Analysis Example

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Small Business Financial Health Analysis Example

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University of Illinois Financial Health Analysis Example

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Limitations of Financial Statement Analysis

Financial statement analysis is indeed important in obtaining relevant information that is useful for making economic decisions and formulating plans. However, there are certain limitations of this analysis, and they are as follows:

Quick Recap

Financial health analysis is important in a business in order to assess the financial situation of a company through its financial statement and other reports. The elements to be assessed in a financial analysis are profitability, solvency, liquidity, and stability.

Financial statement analysis is intended for various users such as the management, creditors, investors, and regulatory authorities for the analysis would give information and is important in making decisions and plans, extension of credits, investment decisions, and many others. The type of analysis can be horizontal and/or vertical or ratio analysis.

Although there are few problems and limitations with regard to financial analysis, this can still be helpful especially in the decision-making of the company.

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