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May 09, 2023
  1. Financial analysis in a simple term can be defined as analyzing the financial situation of an organization. It is an examination of business from different perspectives to understand the financial condition of a business and how it can be strengthened to improve the financial performance of the business (Williams and Dobelman, 2017). Financial analysis includes several aspects of a business such as level and margin of profitability of the business, financial stability of the business, along with solvency as well as the liquidity of the business. A typical financial analysis considers the following.

    •Profitability: a business needs to review and analyze the level of profitability (current and past profitability level) and determine the best possible way to improve the profitability of the business in the future.

    •Solvency: An organization is always concerned and committed to ensuring that it does not fold because it is in debt. Hence, an organization should conduct financial analysis in order to highlight the debt it owes along with drafting a pay-off plan (Corbet et al., 2019). 

    •Liquidity: it is also necessary for a business to analyze its cash position. It is also necessary to ensure that the business has the ability to maintain a positive cash flow even after paying for what it needs immediately.

    •Stability: the business must ensure that it is financially stable. A business should analyze that it does not have any components that may lead the business to fold. Financial analysis helps in drafting a long-term financial plan for the business not to get into any financial trouble.

    Financial analysis in itself is a very complex concept and it involves a wide range of different concepts such as financial statement, income statement, balance sheet, common ratios such as current and debt ratios, asset turnover ratio, etc. financial management, cash management, operating cycle, managing inventory and receivable, and many more (Corbet et al., 2019). Financial analysis helps an organization to develop a short-term as well as the long-term financial plan for the business to achieve the goals and objectives of the organization. The effective financial analysis also helps the organization to manage the risk related to financing that can impact the business severely.

    Apart from this, it is also very important to know about the types of financial analysis as it significantly helps in analyzing the financial condition of the organization and developing an effective financial plan. There are five types of financial analysis such as horizontal analysis, vertical analysis, short-term analysis, multi-company comparison, industry comparison. Horizontal and vertical financial analysis review the financial position of the business itself whereas multi-comparison and industry comparison financial analysis involves analyzing the financial position of the business along with the financial position of the competitors so that the business can develop a financial plan to outdo the competitors and make the business able to sustain for a longer period of time (Judge et al., 2019). Thus, financial analysis is a very significant concept. 

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