Different Roles a Financial Analyst Can Play In Your Business

What are the Different Types of Financial Analysis

and What Role They Play in Judging Financial Position of any Business?

financial analysisThere are different types of financial analysis which can be performed to evaluate how well your company is performing. Our aim here will be to look into different types of analysis that can be performed and their usefulness.

Different Types of Financial Analysis

Factor #1: Material Used

On the basis of material used, financial analysis could be of 2 different types:

  • External analysis
  • Internal Analysis

External Analysis: Such analysis is performed by outside entities without any access to accounting records of your business. These outside entities comprise of creditors, investors, potential creditors, potential investors, credit agencies, government agencies and general public. Analysis is performed by these entities on the basis of financial statements published by the business and as such external analysis serves very limited purpose.

Internal Analysis: When analysis is performed by someone with access to accounting records of your business then it is called as internal analysis. As such, this type of analysis is conducted by executive working for the organization.

Factor #2: Technique of Operation

As per method of operation, financial analysis can have two types, these are:

  • Horizontal analysis
  • Vertical analysis

Horizontal Analysis: Here comparison is done for financial data of your firm for multiple years. The data is presented horizontally in different columns and information for multiple years is compared with data for the base year. Here, any specific year is selected as the base year or the starting point for such analysis. This type of analysis helps in focusing on aspects which have undergone significant change over a certain period of time. Such analysis clearly highlights trends developing for any specific item when comparison is performed between base year value and values for multiple years.

Vertical Analysis: Here analysis is performed for relationship between items present in financial statements in a single accounting period. In vertical analysis, figures are compared with base value that has been selected from same year itself. Some of the tools which are utilized for such financial analysis include different financial ratios and common size financial statements. When used in conjunction with horizontal analysis, it can be quite effective in highlighting financial position of your firm.

Factor #3: Entities Involved

According to entities involved, such analysis can be:

  • Inter firm analysis
  • Intra firm analysis

Inter Firm Analysis: As the name suggests, here financial data for your company is compared with data for other companies or with industry averages over a certain period of time.

Intra Firm Analysis: Here performance is analyzed for your company for a specific time period.

Factor #4: Time Horizon

On the basis of objective of analysis or time horizon, the financial analysis that can be performed includes:

  • Short term analysis
  • Long term analysis

Short Term Analysis: This type of analysis helps in measuring your company's liquidity position and paying capacity for short term (current) obligations.

Long Term Analysis: Here your firm's ability to meet its long term obligations is judged. The aim here to be analysis stability, solvency and profitability of your firm. 

In Conclusion

Thus, we can see that true financial position of your firm can be judged by performing different types of analysis and help the management take better as well as informed decisions.

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About Me

Hello, I am John Vega from Boca Raton, FL.  I stated this website to talk about home improvement.  I spent 10 year in the industry and I love to share what I know.  However, the site has morphed into a multi subject site.  If you need some home improvement advice and you can't find it here you can contact me on the contact page and I will be glad to help you out.