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What is Financial Analysis and Why Is it Important to Organizations?

What do we mean by financial reporting?

Financial reporting refers to the financial results of an organization that are released to its stakeholders and the public, financial statements, which include the income statement, balance sheet, and statement of cash flows. The information is vital for management to make decisions about the company’s future and provides information to capital providers like creditors and investors about the profitability and financial stability of the company. Financial reporting helps track the financial performance of a company on a regular basis with the help of various financial reports.

What is the purpose of financial reporting?

The objective of financial reporting is to track, analyse and report your business income. The purpose of these reports is to examine resource usage, cash flow, business performance and the financial health of the business. This helps you and your investors make informed decisions about how to manage the business. Financial reporting is a way of following standard accounting practices to give an accurate depiction of a company’s finances, including:
Revenues, Expenses, Profits, Capital, Cashflow.

What are the characteristics of financial reporting?

They are relevance, reliability, objectivity, ability to be understood, comparability, realism, consistency, timeliness, economy of presentation, and completeness. The qualitative characteristics of financial reporting are very much important to the external users in making their economic decisions.

What are the components of financial reporting?

The typical components of financial reporting are: The financial statements – Balance Sheet, Profit & loss account, Cash flow statement & statement of changes in stockholders equity. The notes to financial statements. Quarterly & Annual reports (in case of listed companies).

Why is financial reporting important?

Without financial reporting, it’s difficult to understand how well a company is performing from a financial standpoint. In simple terms, a financial report is critical for understanding how much money you have, where the money is coming from, and where your money needs to go. Financial reporting is important for management to make informed business decisions based on facts of the company’s financial health. A lot of the financial information in financial reports is required by law or by accounting standard practices. Financial reporting helps management communicate the past successes and future expectations of the business.

Few reasons why financial reporting is important to your business:

  • Make Better Financial Decisions
  • Tax Purposes
  • Showing Financial Condition
  • Evaluating Operations
  • Examining Cash Flow
  • Decision-making, Planning and Forecasting
  • Compliance
  • Sharing Shareholder Equity
  • Financial Transparency
  • Manage Debt
  • Mitigate Errors

Financial Analysis:

Financial analysis is nowadays considered as the main ingredient in business activity. Financial analytics is a concept that provides different views on the business’ financial data. It helps give in-depth knowledge and take strategic actions against them to improve your business’ overall performance. Financial reporting and analysis give investors, creditors, and other businesses an idea of the financial integrity and creditworthiness of your company. In today’s data-driven world, analytics is critical for any business that wants to remain competitive. Financial analytics can help you understand your business’ past and present performance and make strategic decisions. Financial analytics is a valuable tool that every organization, small and large, should use to manage and measure its progress.

Financial analysis (also referred to as financial statement analysis or accounting analysis or Analysis of finance) refers to an assessment of the viability, stability, and profitability of a business, sub-business or project. It is performed by professionals who prepare reports using ratios and other techniques, that make use of information taken from financial statements and other reports. These reports are usually presented to top management as one of their bases in making business decisions. Financial analysis may determine if a business will:

  • Continue or discontinue its main operation or part of its business.
  • Make or purchase certain materials in the manufacture of its product.
  • Acquire or rent/lease certain machineries and equipment in the production of its goods.
  • Issue shares or negotiate for a bank loan to increase its working capital.
  • Make decisions regarding investing or lending capital.
  • Make other decisions that allow management to make an informed selection on various 
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