Why Is Financial Analysis Important?

August 20, 2021

Do you know how much debt your business has? What your cash flow is like? How your revenue last year compared with your revenue 5 years ago? 

If you’re a business owner and you can’t easily answer these questions, there is a good chance you need to consider financial analysis. Financial analysis can help you get a better idea of your organization’s larger financial picture. Read on to learn more about financial data analysis and why you need it. 

What Is Financial Analysis?

Financial analysis is the process of using historical financial data to get insights into the current financial health of your company and to guide decisions moving forward. 

In simple terms, the process includes an analysis of historical data to make projections on how the company will look in the future. It can help you identify potential increases and decreases in revenue and help you make informed decisions on hiring, business practices, and expenditures.

Different Types of Financial Analysis

There are many different ways to analyze your company’s finances. An experienced financial analyst can guide you on the best one to get a clear picture of your finances. Some options include: 

  • Vertical analysis, which allows comparisons between your company and others 
  • Horizontal analysis, which determines the growth rate over time 
  • Growth rates 
  • Cash flow
  • Rates of return 
  • Valuation
  • Scenario analysis 

Your financial analyst should use best practices when conducting the analysis to ensure that their results are accurate and reliable.

Why Is It Important? 

Looking at historical data is important for so many reasons. To understand how you go to where you are today, you have to understand where you came from and how to move forward in the future. 

Real-Time Tracking

When you have accurate, current data, you can use that information to make quick decisions when necessary. Having real-time data ensures that you are making informed decisions at all times and don’t need to put off decisions until you have more information. 

Identify Liabilities

Knowing the extent of your financial liabilities is necessary to inform any financial decisions that you make. A clear picture of credit card debt, outstanding business loans, money owed to vendors, and credit lines will aid your decision-making when deciding to take on more debt or apply for business loans.

Identify Trends

Trend analysis will help identify certain times of the year where revenue was down and when it was up. This can help when you are making decisions about the coming months and years as you can take steps to avoid those downtimes or at least know when they are on the horizon.

Debt Management

Once you know about all of your liabilities and outstanding debt, you can manage your repayments with financial analysis. A financial analysis also helps identify cash flow and liquidity so you know how much you have available to repay your debts. 

Can You Answer Financial Questions About Your Business? 

If you don’t have a full picture of the financial well-being of your organization, you need to consider a financial analysis. If you don’t have the experts who can do this within your company, outsourcing your accounting is a smart move. Outsourcing your accounting needs allows you access to accountants, bookkeepers, and other financial professionals without having to staff them internally. 

Read to learn more about financial analysis and outsourced accounting? Contact us for a free consultation.  

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