Financial analysis is the investigation and interpretation of financial statements and related financial reports. Trained and certified accountants usually complete this type of analysis. The role of a financial analyst is to use computer software, standard ratios, and other proven calculations to analyze account activity and identify areas of strength and weakness.
There are four types of analysis: internal, fraud investigation, external and formal audit review. The ratios and tools used vary according to the purpose of the analysis and the intended audience. The overall role of financial analysis is to identify patterns, opportunities, weakness, and strength in the business operations.
Internal analysis is also called management analysis. This role is responsible for running and reviewing reports of monthly and annual financial activity. They investigate the details in a specific area of the company and prepare summary reports for senior management.
Financial reporting is critical to identify how money and resources are spent, to track internal revenue sources, and to compare actual results to budgets and forecasts. Weak internal financial analysis can lead the company to overspend or fail to capture key market share due to lack of cash flow and poor planning.
Fraud investigation techniques rely on analysis to identify departments with weak internal controls or business procedures. The transactions in these areas can be reviewed in detail using auditing or financial analysis software tools. All financial transactions have an impact on the reported account value. Comprehensive analysis often uncovers fraudulent activity, due to their impact on the financial statements.
Financial analysis is also completed by external agencies, ranging from potential investors to financial institutions. These parties typically use the financial statements as their source of information. The field of financial analysis is quite mature, with a wide range of computations that are used to investigate transactions in a firm’s financial reports. They can also highlight areas that are inconsistent and uncover accounting errors.
In a formal audit of the financial statements, the auditors complete an analysis exercise to validate the information in the statements. In addition to an actual audit of the transactions, an analysis allows the firm to provide an opinion on the financial stability and longevity of the firm. Both these functions add value to the audit report.
Accounting professionals are all required to complete courses in intermediate and advanced analysis. In addition, they also complete courses in statistics, data management and computer systems. The combination of these skills allows them to quickly and accurately understand and interpret the results of the analysis.