Financial Analysis: Financial Strengths And Importance Of Financial Management

SIGNIFICANCE

Financial statement analysis is the process of identifying the financial strengths and weaknesses of the firm by properly establishing relationships between the various items of the balance sheet and the profit and loss account. The management of the firm or the parties outside the firm, viz. proprietors, trade creditors, lenders, investors, labour unions, analysts and others can carry out the financial analysis of a firm. The nature of analysis will vary contingent upon the reason of the analyst. A technique frequently used by an analyst need not necessarily fill the need of other analysts in view of the distinction in the interests of the analysts. The following ways describe the uses and importance of financial analysis to

It has a broad scope, which includes top management in general, and other functional managers. Management of the firm would be interested in every aspect of the financial analysis. It is their overall responsibility to see that the resources of the firm are used most efficiently and that the firm’s financial condition is sound. Financial analysis helps the management in measuring the accomplishment of the organization’s operations, some help with evaluating the individual’s performance and assessing the system of internal

Trend Analysis: Trend analysis is the method of considering the operational results and financial position over a progression of a long period of time. Using the previous years’ data of a business enterprise, trend analysis can be done to observe the percentage changes over time in the selected data. The trend percentage is the percentage relationship, in which each item of different years bears to the same item in the base year. Trend analysis is important because, with its long run view, it may point to basic changes in the nature of the business. By looking at a trend in a particular ratio, one may find whether the ratio is falling, rising or remaining relatively constant. From this observation, a problem is detected or the sign of good or poor management is detected.

4. Ratio Analysis: It describes the significant relationship, which exists between various items of a balance sheet and a statement of profit and loss of a firm. As a technique of financial analysis, accounting ratios measure the comparative importance of individual items of position and income statements. In order to assess the profitability, solvency and efficiency of a company, ratio analysis can be used as an effective