Financial Statement analysis is a process of examining a company’s value or performance by analyzing company’s finance statements, i.e., balance sheet, income statement and cash flows. It is used to evaluate investment opportunities, chances of mergers and acquisitions, capital increments and to assess a company’s past financial performance as well as forecast the future ones. To be precise, it helps to get a insight into the financial profile of the company. Three main techniques are used for financial statement analysis, namely, horizontal, vertical and financial ratios analysis. The role of a financial analyst though existed in the past however got an emerging boost in the recent decades. These professionals today have to do more than just work with numbers as was the case in the earlier days. As business scenarios have evolved, so is the role of financial analysts. A financial expert does require few repertoires of skills to carry out the myriad task of ensuring good financial health of a company.
Accounting and Finance Skills
A strong and solid understanding of accounting fundamentals is sine qua non of any financial analyst. Ability to read financial statements, prepare balance sheets, income and revenue statements, cash flows their analysis, budgeting, taxes remain the first basic skills. Also a financial analyst must understand the nuances to link financial statements dynamically. For example, connecting net income on the income statement to retained earnings on the balance sheet. It is quite a tricky skill to master. However these skills differentiates a good finance analyst from any other profession. Besides thorough understanding of concepts such as the matching principle, accruals, revenue recognition, depreciation and amortization are also essentially required to become a financial pro.
Strong working knowledge of Excel is needed for financial analysis. A financial analyst must be adept in Excel analytics like formatting, Vlookup, Hlookup, pivot tables and valuation equations. Proper knowledge of Excel shortcuts help to save time and build financial models quickly. One needs to grasp the main formulas and functions properly to perform complex calculations and financial analysis. Excel is used in wide arena relating to company capital budgeting analysis, risk analysis and discounted cash flows. Excel is also used for Black Scholes pricing. Excel also is a handy tool in cost accounting. Since Excel helps to to take many informed business decisions by allowing tracking and dissecting huge information, mastery in Excel is utmost necessary for any financial analyst.
Being good at predicting something properly is a rare skill that can be mastered with practice. Random forecasting can be done by anybody, but in case of financial analysis, predicting future results based on past trends is carried out. To carry this accurately, financial analysts mostly use regression analysis and use certain assumptions about future unknowns.
Logical and mathematical skills
Mathematics, calculation and numbers are areas related to logic. Unless a logic and rationality can be established in any calculation it has no validity. Same goes with financial analyst. Unless they can relate any logic or rationale in their analysis while creating fin model for companies, they can’t be classified as financial experts.A good financial analyst must be able to think logically, sequentially in an organized manner. A simple top down or bottom up serial and logical set of information is required for any analysis and building a financial model. A good financial analyst must be a number cruncher, i.e., brisk or swift in any complex calculations.Role of a financial analyst demands carrying out complex mathematical calculations be it through DCF calculation or credit default swaps.
Becoming a good financial analyst requires a lot of concentration and attention to detail skills. Unless you have that hawk’s eye to notice every fine details of every aspect of finance of a company, how will you be able to put in analytics to the same? Analyzing and creating a model, recommending certain investment plans based on some predictive assumptions, all these require a lot of fine tuning in terms of putting attention to details. While making intricate finance models for companies, lots of information, parameters and constructs need to be taken into account. Taking into consideration all these is not a plain task. It demands lot of patient handling and ability to put equal emphasis to every detail.Any silly mistake or minor error in calculation or trend analysis can give way to massive changed conclusions. A financial analyst must develop the habit to put in extra effort to attend to all details.
Simplicity in presentation
The cornerstone of any maven is to instill simplicity in whatever they do. The real soul of efficacy lies when a complicated thing can be delivered in the most doable and simple manner. By now, you have understood the level of work undertaken by a financial analyst in a company. However, until an analyst can dissect down the most of complex things to simple format, making it lucid for others, he can’t be labeled ‘good’ in his role. He must train him to limelight the essential items thereby discarding the rest.
Pitching your ideas or workmanship in a visually appealing way is very important in any profession. So, it is same in financial analysis too. However crafting a wow presentation about the financial analysis or model of the company is not an easy affair.As a financial analyst, one needs to master the art of tactfully playing with powerpoint slide elements to represent his/her thoughts beautifully through the PPT. Designing a PPT with right amount of visual triggers, design and aesthetics to discuss lucidly about working capital, cash flows, risks, taxes, balance sheets, stocks, mergers and so on is what is required by a financial analyst.
Though it is not mandatory for financial analysts to possess advanced technical skills, being good at numbers, prediction and above mentioned skills are enough for them to pull through their role. However, as the wave of technical revolution reestablishing the entire the business world, currently working knowledge of certain computer languages like Python, SAS, R or SQL have become necessary. It helps to manage large data sets and helm through databases with ease.
Strategizing and Decision Making Skills
A general thought block that exists in the corporate is that strategizing and decision making are only limited to senior executives. This is no more true. Being a strategic thinker and possessing the caliber to take a decision really sets you apart as an asset to your company. Any company will put a high value on a strategically minded financial analyst whose vision can trigger data driven consequential improving results. Distilling large amounts of relevant information and then using them to build on a high level strategy is what sets a world class financial professional apart.
Financial Analysts are growing to be one of the coveted careers. As per BLS statistics… “Demand for financial analysts tends to grow with overall economic activity.”The bottom line is that financial analyst is integral parts of any company whose skills can flagship the financial decisions of a company.