Business Intelligence Analyst Bell Income – Financial statement analysis is the process of analyzing a company’s financial statements for decision-making purposes. External stakeholders use it to understand the overall health of an organization and to evaluate financial performance and business value. Internal constituents use it as a monitoring tool for managing the finances.
A company’s financial statements record important financial data about every aspect of a company’s activities. As such, they can be evaluated based on past, current and projected performance.
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In general, financial statements are centered around generally accepted accounting principles (GAAP) in the United States. These principles require that a company create and maintain three important financial statements: the balance sheet, the income statement, and the cash flow statement. Public companies have stricter financial statement reporting standards. Public companies must follow GAAP, which requires accrual accounting. Sole proprietorships have greater flexibility in their financial statement preparation and have the option of using accrual or cash accounting.
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Various techniques are often used as part of financial statement analysis. Three of the most important techniques are horizontal analysis, vertical analysis, and ratio analysis. Horizontal analysis compares data horizontally, by analyzing values of line items over two or more years. Vertical analysis looks at the vertical effects that line items have on other parts of the business and the proportions of the business. Ratio analysis uses key ratio metrics to calculate statistical relationships.
Companies use the balance sheet, income statement, and cash flow statement to manage their company’s operations and provide transparency to their stakeholders. All three statements are interconnected and create different views of the activities and performance of a company.
The balance sheet is a report of the financial value of a company in terms of book value. It is divided into three parts to include the assets, liabilities and shareholder of a company. Short-term assets such as cash and accounts receivable can tell a lot about a company’s operational efficiency; liabilities include the company’s cost arrangements and the debt capital it pays; and shareholder equity includes details about equity investments and retained earnings from periodic net income. The balance sheet should balance assets and liabilities for equal shareholder. This figure is considered the book value of a company and serves as an important performance metric that increases or decreases with the financial activities of a company.
The income statement breaks down the revenue a business earns against the expenses involved in its business to provide a bottom line, meaning the net profit or loss. The income statement is divided into three parts which help in analyzing business efficiency at three different points. It starts with revenue and the direct costs associated with revenue to identify gross profit. It then moves to operating profit, which subtracts indirect expenses such as marketing costs, general costs and depreciation. Finally, after deducting interest and taxes, the net income is reached.
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Basic analysis of the income statement usually involves the calculation of gross profit margin, operating profit margin, and net profit margin, each dividing profit by revenue. Profit margin helps to see where operating costs are low or high at different points of the operations.
The cash flow statement provides an overview of the company’s cash flows from operating activities, investing activities and financing activities. Net income is transferred to the cash flow statement, where it is included as the top line item for operating activities. Like its title, investing activities include cash flows involved in firm-wide investments. The financing activities section includes cash flow from both debt and equity financing. The bottom line shows how much money a company has available.
Companies and analysts also use free cash flow statements and other valuation statements to analyze a company’s value. Free cash flow statements arrive at a net present value by discounting the free cash flow that a company is estimated to generate over time. Private companies may hold a valuation statement as they move toward potentially going public.
Financial statements are maintained by companies daily and used internally for business management. Generally, both internal and external stakeholders use the same corporate finance methods for tracking business activities and evaluating overall financial performance.
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When doing comprehensive financial statement analysis, analysts typically use multiple years of data to facilitate horizontal analysis. Each financial statement is also analyzed using vertical analysis to understand how different categories of the statement affect the results. Finally, ratio analysis can be used to isolate some performance metrics in each statement and bring together data points across statements collectively.
Financial statement analysis evaluates the performance or value of a business through a company balance sheet, income statement, or statement of cash flows. By using a number of techniques, such as horizontal, vertical or ratio analysis, investors can develop a more nuanced picture of a company’s financial profile.
First, horizontal analysis involves comparing historical data. Usually, the purpose of horizontal analysis is to detect growth trends over different time periods.
Second, vertical analysis compares items on a financial statement in relation to each other. For example, an expense item could be expressed as a percentage of company sales.
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Finally, ratio analysis, a central part of fundamental equity analysis, compares line item data. Price-to-earnings (P/E) ratios, earnings per share, or dividend yield are examples of ratio analysis.
An analyst may first look at a number of ratios on a company’s income statement to determine how efficiently it is generating profits and shareholder value. For example, gross profit margin will show the difference between revenue and cost of goods sold. If the company has a higher gross profit margin than its competitors, this can indicate a positive sign for the company. At the same time, the analyst can observe that the gross profit margin has increased over nine fiscal periods, and apply a horizontal analysis to the business trends of the company.
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The offers that appear in this table are from partnerships from which compensation is received. This compensation may affect how and where ads appear. does not include all the offers available on the market. Business intelligence (BI) refers to the procedural and technical infrastructure that collects, stores and analyzes the data produced by the activities of a company.
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BI is a broad term that includes data mining, process analysis, performance benchmarking and descriptive analytics. BI parses all the data generated by a business and presents easy-to-digest reports, performance measures and trends that inform management decisions.
The need for BI was derived from the concept that managers with inaccurate or incomplete information tend to make worse decisions on average than if they had better information. Financial model makers recognize this as “garbage in, garbage out.”
BI seeks to solve this problem by analyzing current data that is ideally presented on a dashboard of quick metrics designed to support better decisions.
Most companies can benefit from incorporating BI solutions; managers with inaccurate or incomplete information will, on average, tend to make worse decisions than if they had better information.
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These requirements mean finding more ways to capture information that is not already recorded, checking the information for errors, and structuring the information in a way that allows for broad analysis.
In practice, however, companies have data that is unstructured or in different formats that do not make for easy collection and analysis. Software companies thus provide business intelligence solutions to optimize the information from data. These are enterprise-level software applications designed to unify a company’s data and analytics.
Although software solutions continue to develop and become increasingly sophisticated, data scientists still have to manage the trade-offs between speed and the depth of reporting.
Some of the insights that emerge from big data have companies trying to catch everything, but data analysts can usually filter sources to find a selection of data points that can represent the health of a process or business area as a whole. This can reduce the need to capture and reformat everything for analysis, saving analytical time and increasing reporting speed.
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BI tools and software come in a wide variety of forms. Let’s take a look at some common types of BI solutions.
There are many reasons why companies adopt BI. Many use it to support functions as diverse as hiring, compliance, manufacturing and marketing. BI is a core business value; it’s hard to find a business area that doesn’t benefit from better information to work with.
Some of the many benefits that companies can experience after adopting BI in their business models include faster, more accurate reporting and analysis, improved data quality, better employee satisfaction, reduced costs and increased revenue, and the ability to make better business decisions.
BI is derived to help companies avoid the problem of “garbage in and garbage out”, as a result of an accurate or insufficient data analysis.
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For example, if you are in charge of production schedules for several beverage factories and sales are showing strong month-on-month growth in a certain region,
