Whether for evaluating businesses, projects, budgets, financial plans, and other related financing, financial analysis is the best thing to do to determine the key factors that will bring about change regarding the entities involved. In this case, financial analysis focuses more on analyzing an entity if it’s stable, solvent, profitable, and feasible enough to attract potential investment. To be able to determine those things, an analyst usually refer to the financial statements – Income Statement, Balance Sheet, and Cash Flow Statement.
Due to the constant changes in the economy, technology, trends, market, and many more related factors that caused risks and opportunities to the industries, financial analysis became a critical factor to be able to ensure that any opportunities won’t be wasted, avoid risks which could harm the business, preparing for a strategic plan, setting financial policies, etc. It is undeniable that financial analysis is very helpful for anyone that’s running a business or one that wants to earn more money.
There are five key elements to realize when conducting a financial analysis such as:
1. Revenues – determining the revenue growth, revenue concentration of the market, and revenue from the productivity of the employees. Though depending on what kind of business or industry you prefer, there might be slight changes, but the point is, revenue is a key point which needs to be observed and analyzed.
2. Profits – analyzing the profit earned will determine if the business will survive in the long run and will have enough finances to handle the future expenses. First off, you’ll need to determine the gross profit margin, then the operating profit margin, and finally the net profit margin, to check if the resulting values is as close to what was estimated in your financial plan.
3. Operational Efficiency – determining whether you’re making full use of your resources efficiently and not wasteful. The variables needed to be scrutinized are the account receivables turnover, inventory turnover, and depending on the business model, anything related to allocating operational expenses efficiently. After all, lacking operational efficiency will cause harm to the potential profits and growth of the business. Thus, it is important to analyze this element properly.
4. Capital Efficiency and Solvency – these elements are more of an interest to the potential investors or lenders since it focuses on areas such as Return on equity and Debt to equity. Both are important factors to keep the business running and to ensure that the business will stay solvent not just in the present but also in the future. Thus, analyzing the capital efficiency and solvency of a business will help determine beforehand if the business needs more finances or is earning enough to guarantee feasibility.
5. Liquidity – the analysis will address the business’ ability to generate enough cash to cover the expenses incurred since the revenue growth or profits can’t really compensate for poor liquidity, otherwise, the business will not continue its operations. Factors such as the current ratio and interest coverage needs to be analyzed as these two can be used to measure a business’ liquidity.
Financial Analysis is not an easy task to do so it is no question that you will need help to complete one. But, this doesn’t mean that it’s an impossible task. You can take advantage of countless tools which you can use to help you in conducting a financial analysis. One of these tools are financial analysis excel template. A financial analysis excel template will serve as your base to start with your task and guide you on certain key points that you need to realize. The same with financial statement template in Excel which you also need to base on your analysis report.
If you are looking for a platform where you can acquire financial analysis excel template or financial statement template in Excel, then you can check out eFinancialModels. They also offer financial modeling assistance and industry-specific financial model templates which you can choose from according to your needs. You can also check the templates according to its uses here: Financial Models by Use Case so you will have an easier time looking for your preferred model for financial analysis.