Analysis Of Financial Performance - How to Do It Effectively?

Analysis of financial performance is something that every financial professional must know how to do right. It is because unless he or she would know how to analyze financial performance, they would not be able to go through the financial statements of any company or organization and guide them the right way about their progress and profits. Knowing in detail about financial performance is crucial for those who have studied finance and are working in the field as it gives them an edge over others who do not know what financial planning and estimations are all about.

According to a dissertation writing service, financial performance can be analyzed most efficiently with an understanding of the structure of financial statements, the economic characteristics of the industry in which a particular organization operates, and the strategies that the firm uses to differentiate itself from the competitors. The financial analyst needs to be aware of the methods, types as well as approaches that are used for performing this task and coming up with the right evaluations that help an organization do better in the future. This article discusses the steps that help in effective analysis of financial performance:

Identifying The Industry Economic Characteristics:

First of all, determining a value chain analysis for the industry, the stream of activities involved in the creation, manufacture, and distribution of an organization’s products and/or services is very important. Various techniques can be used for analyzing economic attitudes and help to provide the industry economic characteristics.

Determining Company Strategies:

This is important because without knowing the company's strategies, no financial progress can be measured. The analyst must look at the nature of services and products being offered by an organization, including the uniqueness of the product, level of profit margins, creating of brand loyalty as well as control costs. Factors such as supply chain integration, geographic diversification, and industry diversification should also be carefully considered.

Assessment Of Organization’s Financial Statements:

Reviewing the key financial statements within the context of the relevant accounting standards is very important for analyzing financial performance. In examining balance sheet accounts, issues such as recognition, valuation, and classification are keys to proper evaluation. The crucial question is that whether the current balance sheet is a complete representation of the organization’s economic position. Evaluation of the statement of cash flow helps to understand the impact of liquidity position from its operations, investments, and financial activities over the period. In simple words, it will determine where funds came from, where they went, and how the overall liquidity of the firm was affected.

Analysis of Current Profitability and Risk:

It is here that the financial analyst can add great value and evaluate an organization and its financial statements carefully. The most effective tools used for financial analysis are key financial statement ratios relating to liquidity, asset management, profitability, debt management/coverage, and risk/market valuation. The analyst needs to ask two broad questions; how profitable are the operations of the firm relative to its assets, independent of how the firm finances those assets and how profitable is the firm from the perspective of the equity shareholders. It is crucial to analyze any financial statement ratios comparatively, look at the current ratios with those from earlier periods or relative to other firms or industry averages to come up with the best estimations.

Prepare Forecasted Financial Statements:

Even though it is a challenging task, the financial analyst or expert will have to make reasonable assumptions about the future of the organization and determine how these assumptions will affect both the cash flow as well as the funding. This is often presented in form of a pro-forma financial statement and it is based on the technique such as percent of sales approach to help organizations see where they are standing and what are the future predictions based on their current situation.

Value The Organization:

There are many approaches to valuation but the most common of them is a type of discounted, cash flow methodology. These cash flows could be in the form of projected dividends or more detailed techniques such as free cash flows to either the equity holders or on an enterprise basis. There are other approaches too that include using relative valuation or accounting-based measures such as economic value added.

Analysis of financial performance is not just a game of numbers. Instead, it is something that gives rise to further speculation and helps organizations focus on the key areas that help them manage their profits and losses better and detect any manipulations that affect their performance.