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The Purpose & Power of Financial Analysis

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Though it would seem that the goal of most businesses would be to make a profit, there’s a bit more to running and growing a business. After all, a business can enjoy a profit margin,but if it doesn’t generate enough revenue, it won’t have enough cash flow for payroll, business expenses, internal investments, and other necessary costs.

Even for companies that have high fiscal priorities, financials need to make sense for the lights to stay on. If they don’t, that’s when a for-profit company might need to look into becoming a non-profit.

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So, regardless of what business’ internal goals are, maintaining a healthy balance sheet is non-negotiable.

Understanding the purpose and power of financial analysis helps organizations maintain sustainable operating expenses and keep themselves positioned for long-term success.

Financial Analysis (And Its Purpose)

Financial analysis is the process of evaluating a business—its projects, budgets and other finance-related entities to determine overall performance and suitability. While myriad details comprise any type of financial analysis, the point is to gauge whether an organization is stable, solvent, liquid, or (in cases of investment) if the business is profitable enough to be worthy of a particular investment.

As Investopedia notes, return on assets (ROA) is a common ratio used to determine how efficient a company is at using its assets, and measure their profitability. In general, financial analysis is split between technical and fundamental analysis. Ratios like earnings per share (EPS) would be a fundamental analysis while a quantitative chart, like moving averages (MA), would be a technical analysis.

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It’s important for businesses to drill down into both fundamental and technical aspects of their company regularly to capture the essential aspects of their operation’s health, such as investment areas of interest, valuation, key risks, and outlook of future performance.

Financial Analysis Use Cases

It would seem that finance-related companies would be the biggest users of financial analysis. However, as touched on above, any kind of business needs a somewhat healthy balance sheet to operate. That’s why companies of all sizes, industries and business models use financial analysis to weigh historical and current performance against overall economic conditions and to align objectives toward long-term business goals.

Especially in today’s fast-paced business ecosystem where consumers reign supreme and data generates at a lightning-fast pace, conducting both ad-hoc and regular financial analysis is imperative to get an edge on the competition.

Continually interacting with data is no simple task, but next-wave data analytics software is meeting businesses in the middle. Financial analysis tools like ThoughtSpot offer user-friendly features that provide instant insights to every employee. Comprehensive quarterly reports are easier to put together as will the daily questions that inevitably surface.

Business Impact of Financial Analysis

It’s no secret that company data holds a lot of value, but what are the impacts of using financial data effectively?

Regularly monitoring and exploring various economic indicators creates a more informed, intelligent workforce. Having easy access to accurate analytics reduces personal bias and empirical arguments drowning out the cold hard numbers.

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When a focus is on numbers, better decisions are made and new investment areas easier to assess. It’s more straightforward determining the efficacy of current investments and developing new initiatives to kickstarts. Ad-hoc financial analysis insights also keep organizations constantly abreast of their strengths and weaknesses, not just once a quarter.

These are high-level benefits that any type of business would love to experience but leveraging financial analysis tools and tapping into ongoing insights can bring so much more to a company. The only way to know for sure though is to start conducting ad-hoc and regular financial analysis reports with a user-friendly, insight-driven platform.

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