This Is How You Create a Meaningful Financial Analysis

1. What is a financial analysis?
2. Horizontal & Vertical Financial Analysis: What's the Difference?
3. How to conduct a financial analysis step by step 
4. These tools are suitable for creating a financial analysis
5. Learning from the past for the future

In this article, you will learn what a financial analysis is
and how you can successfully conduct it step by step in your company.

But why is this necessary? The financial situation of your company is an important indicator of its stability and future viability. That's why you should keep an eye on it and be able to interpret the results in comparison with previous fiscal years or the competition. That's why in this post, you will learn what a financial analysis is, how horizontal and vertical financial analysis differ, and how you can successfully create your own financial analysis. We also provide you with helpful tools to assist you in creating it.

What is a financial analysis?

Financial analysis is a process in which you
use your company's financial data to evaluate its economic performance. This allows you to make recommendations that can improve your company's financial situation in the future. Therefore, it is an important tool that you should pay attention
to when creating your financial planning.

The goal of financial analysis is to use the underlying data to draw conclusions about the present and past, as well as to make forecasts for the future. Ultimately, your organization should be stable, liquid, and solvent and operate profitably after conducting your financial analyses.

You can use an internal financial analysis as a tool for monitoring and managing your finances, whereas an external financial analysis is used more by investors to assess economic performance, understand the overall financial situation, and determine the value of your company. Financial analysis can also act as an operational early warning system.

To ensure that you use and process the correct data for your analysis and deliver the correct result, a clear formulation of the goal is essential.

You should ask the following questions in advance:

• What is the purpose of this financial analysis?
• What questions are to be answered
  through the results? 
• What level of detail is necessary to fulfill this purpose?
• What data is available for your financial analysis?
• What factors can possibly affect
  your analysis?

Primarily, you will use your company's annual report, the annual financial statements, and the accompanying notes to prepare your financial analysis. If you have a management report or a management commentary, you can also include these in your work. Although the annual financial statements provide information about past revenues and cash flows, current liabilities, assets, and equity, you still need to gather additional information from your company in order to make a prognosis. Which information this is always depends on the individual question of financial analysis and the type you choose.

Horizontal & Vertical Financial Analysis: What's the Difference?

You can conduct a financial analysis in two different ways – horizontally or vertically. But what is the difference? The biggest difference is that in horizontal financial analysis, you compare a percentage amount of an item from the annual financial statements with the corresponding counter-item from the base year. In vertical financial analysis, on the other hand, you look at each amount in the annual financial statements individually with another amount from the same financial period and put these in relation to each other. Let's take a closer look at horizontal and vertical analysis for better illustration.

The horizontal analysis is also referred to as trend analysis, as you compare the amounts from the annual financial statements over several years. They are viewed as a percentage of individual items from the base year. In the horizontal analysis, you use financial ratios, which are particularly useful for assessing a trend. These include liquidity ratios, activity ratios, debt ratios, profitability ratios, and market ratios. These figures represent the relative change of different positions over time and can help you classify your company in benchmarking and comparison of industry standards.

In the vertical analysis, on the other hand, you look at each amount on the balance sheet as a percentage of another amount. This means that you represent a row of a selected balance sheet position as a percentage of your total assets, liabilities, or equity. Therefore, you choose a reference position to determine the percentage of an item. For example, you can put your receivables from deliveries and services in relation to the total of your assets. You can directly compare this calculated percentage with the corresponding percentages of other companies or past years. Through the vertical analysis, you can thus create both an intra-company and an industry-internal comparison.

How to conduct a financial analysis step by step 

Once the purpose and context for your financial analysis has been clarified and you want to proceed with the implementation, you can use the following step-by-step guide.

Collect analysis data: Depending on whether you want to conduct a horizontal or vertical financial analysis, you first select the relevant data that you need for your work.

Prepare your data: To get meaningful results, you need to compare your figures. So now, you compare the key figures that you have received, for example, from your annual financial statements, with the values from the previous year. If you want to recognize an even more meaningful trend, you calculate the financial key figures for the last three to five years. This way, you can see how the key figures have developed over the years. For example, if you can see that the average number of days for existing receivables has shortened, this means that your company is now collecting money from your customers faster than in previous years. This increases liquidity.

Conduct your analysis: Since you are not only interested in plain figures, but also the backgrounds for your financial analysis, in the next step it is about identifying the factors that have changed your financial key figures. If these still exist, this could mean stability for your company. But if the framework conditions have changed, this could also create opportunities or risks.

Put your results in a competitive context: Now you probably also want to know how your company performs compared to its competitors. To do this, you first select comparable companies. These can either be from your own or other sectors, as long as they bring the same prerequisites as you. The selection depends on the purpose of your financial analysis and should therefore certainly be determined in advance. The comparison with competitors is an important piece of the puzzle to correctly classify your own financial key figures and to be able to understand the environment. 

Draw conclusions and develop recommendations: In the last step of your financial analysis, you draw conclusions from the insights you could gain by comparing with previous years and the competition. Combining these two perspectives gives you a meaningful picture that allows for a predicted trend into the future. In doing this, you should always keep an eye on current political, economic, and technological developments and include these in your analysis report.

These tools are suitable for creating a financial analysis

To get a comprehensive and meaningful financial analysis for your company and to draw the right conclusions from it, you can get support in the form of a financial planning software. This reliably analyzes your financial situation and removes many helpful functions for you, allowing you to focus on other areas. To make it easier for you to choose the software that suits your company, we have compiled a variety of financial planning tools for you on OMR Reviews. These include among others:

COMMITLY

Agicap

Tidely

FinanzGeek

Helu

flowpilot

Adam

Lucanet

Corporate Planning

Based on solid experience reports from our users, overviews of functions, screenshots, and reviews, you can get a comprehensive overview of the various functions that the different tools offer and easily select the software that meets your requirements in a jiffy.

Learning from the past for the future

Now you know that the financial key figures you receive from your company's annual financial statements not only provide statements about the present and past situation of your company, but can also be important indicators for future direction. With the right questions and comparisons, conducting a financial analysis will help you draw the right conclusions and make decisions that really advance your company. Because sometimes a look back into the past helps to be better prepared for the future.