What is financial analysis?
Financial analysis is the investigation and interpretation of financial statements and related financial reports. Trained and certified accountants usually complete this type of analysis. A financial analyst's role is to use computer software, standard ratios and other proven calculations to analyze account activity and identify areas of strength and weakness.
There are four types of analysis: internal, fraud investigation, external and formal audit review. The proportions and tools used vary according to the purpose of the analysis and the target audience. The overall role of financial analysis is to identify patterns, opportunities, weaknesses and strengths in business operations.
Internal analysis is also called managerial analysis. This role is responsible for executing and reviewing monthly and annual financial activity reports. They investigate the details in a specific area of the company and prepare summary reports for senior management.
Financial reporting is essential for identifying how money and resources are being spent, tracking internal revenue streams, and comparing actual results to budgets and forecasts. Poor internal financial analysis can lead the company to overspend or fail to capture important market share due to lack of cash flow and poor planning.
Fraud investigation techniques rely on analysis to identify departments with weak internal controls or business procedures. Transactions in these areas can be analyzed in detail using financial analysis or auditing software tools. All financial transactions have an impact on the reported account value. Comprehensive analysis often reveals fraudulent activity due to its impact on financial statements.
Financial analysis is also carried out by external agencies, from potential investors to financial institutions. These parties often use the financial statements as a source of information. The field of financial analysis is quite mature, with a wide range of calculations being used to investigate transactions in a company's financial reports. They can also highlight areas of inconsistency and uncover accounting errors.
In a formal audit of financial statements, auditors complete a screening exercise to validate the information in the financial statements. In addition to an actual audit of transactions, an analysis allows the company to give an opinion on the financial stability and longevity of the company. Both features add value to the audit report.
All accounting professionals are required to complete intermediate and advanced analysis courses. In addition, they also complete courses in statistics, data management, and computer systems. The combination of these skills allows them to quickly and accurately understand and interpret analysis results.