An Insight Into Eight Different Kinds
of Financial Analysis and Their Usefulness
Financial analysis can be of different types and helps in evaluating performance of any company. As such we will go through details of a range of financial analysis which experts perform and also look into usefulness of such analysis.
8 Different Kinds of Financial Analysis and Their Usefulness
External/Internal Analysis – Horizontal/Vertical Analysis – Inter Firm/Intra Firm Analysis – Short Term/Long Term Analysis
Financial analysis conducted by external entities falls in this category wherein such entities do not have any kind of access to organization's accounting reports. The external entities could be the investors, credit agencies, creditors, government agencies, potential investors, general public or the potential creditors. This type of external analysis is of little value to an organization since the analysis is based upon financial statements made available by the organization.
In internal analysis the person conducting the analysis has access to accounting information of your organization and as such tend to be more detailed and informative in comparison to external analysis.
In this type of analysis financial information for several years is compared. The main focus of such analysis is to examine aspects undergoing major changes within a specific time period. Another advantage of this type of analysis is that it helps in finding trends (when data comparison is made between several years and the base year) which have developed for certain products. Process of conducting such analysis consists of presenting information into different columns in a horizontal manner and comparison is made between data for several years with information available for base year.
The difference between horizontal and vertical analysis is that in vertical financial analysis single accounting period is taken into consideration while analysis is done to ascertain relationship present between different items. In addition to it, here base value is taken from that year itself for making a comparison between different figures. Moreover, there are different tools (such as financial statements and financial ratios) which are used while such analysis is performed.
Inter Firm Analysis
In this type of financial analysis comparison is made between financial information of your organization with details available for other firms or with various industry averages that are available for a given time period.
Intra Firm Analysis
In intra firm analysis the performance of your organization is analyzed for a certain time period.
Short Term Analysis
The benefit of short term analysis is that it assists the management in examining liquidity position of your firm as well as in determining capacity to pay off short term obligations.
Long Term Analysis
As the name suggests, this type of analysis is utilized for judging company's ability to pay off long term obligations. Long term analysis also helps in examining company's solvency, stability as well as profitability.
A Final Note
To summarize we will say that financial analysis is quite useful in understanding position your organization is in. Such analysis helps management team take required steps to ensure business processes function to achieve organization's goals and objectives.