Financial analysis is the procedure of assessing the viability of a business project. Financial analysis is conducted by a financial analyst. In financial analysis, the money that comes into the business and money that goes out is studied. The profitability of a business is an essential aspect of financial analysis. Financial risks a business may be facing are also looked at.
The type of financial analysis carried out is determined by whether it is for external investor’s investment decisions or for internal investor’s investment decision making. The financial information of an organization is reviewed by an external investor with the help of a financial analyst so that they find out if it is a wise decision to invest in the company. You need to know that your business performance will be determined by studying the financial ratios, for example, the debt ratio.
The following aspects will determine if an external investor will invest in your company or not. It is important for you to know that the number of times a company assets exceed its liabilities is of importance to the external investor. The more current assets a company has, the higher the liquidity ratio. A higher liquidity ratio shows that the company lacks viable investments so that they hold a lot of current assets. Low liquidity shows that the companies liabilities are falling due and may use up all the current assets. It is essential that the liquid ratio of your company is not too high and not too low. The other ratio that external investors look at is the debt ratio. If the debts of a company are more than the equities, it means that the company is operated using borrowed financial. Too much borrowing discourages external investors. Most businesses will want the company financial situation to look good by manipulating financial information.
The other reason for financial analysis is to make internal investment decisions. Financial analysis will show if an organization should continue with its main operation or discontinue by looking at the return on investment. You will find where you can get finances for your business. The profitability of company projects is also the main focus of financial analysis. A company will also find out its solvency status by carrying out financial analysis. You will know that your business can adequately pay for things it acquires. Financial analysis is essential when you want to acquire machinery by leasing.