Master the Fundamentals of Financial Analysis for Better Decision Making

Master the Fundamentals of Financial Analysis for Better Decision Making

What is Financial Analysis?

Financial analysis, in simple terms, can be defined as an assessment of a company’s performance and using financial data to make recommendations on how the company will move forward in the future.

Financial Analysts use the company’s historical financial data and provide necessary feedback on how the company’s performance will be in future

The financial analysis also means setting the important financial policies, revisiting the economic trends, and building long-term plans or goals for their businesses so that they can understand their investment portfolio and move forward with investing incorrect directions to generate better returns. All these evaluations can be done on an excel sheet.

Pointers Of Financial Analysts for Startups?

Large corporations and businesses have a responsibility to shareholders and owners to use earned income in a way that works in favor of increasing the company’s wealth.

Also, the financial analysts need to understand how and where startups have invested their resources, as well as how secure and viable that financial outlay will be going forward. An analyst needs to not only understand how current investments affect the company, but also how those investments and future financial interactions will be impacting growth- short-term and long-term. The analyst needs to provide information on the company's current financial position and make recommendations to company decision-makers.


Below listed points are for Financial Analyst for Startups:

1. Financial model: Creation Of Financial Model using analysis about investments, resources, transactions. Also, modeling includes decisions to be taken on Mergers, acquisitions, etc.

2. Historical Data: Usage of Financial Historical data as an Input in Financial Modelling. Other inputs are market trends, microeconomic factors for Financial Analysis.

3. Notice authority that would publish your data on the industry you are covering for your Startups

4. Analyze cash flows, income statements,  PE ratios, Return On Investments, etc.

5. Attend con calls and stay updated with news and business economy etc so that you can predict the future of your business or industry you are incorrect.

6. Financial analysts need to provide advice or feedback directly to the management of the company they work for, to external clients of the business they work for, or it can be both.


What is Financial statement analysis? What are the objectives of Financial statement analysis?

Financial Statement Analysis is an analysis that shows important relationships between different items in the financial statements. Financial Statement analysis is all about the methods used for as­sessing and recollecting the results of past performance and current financial position as they relate to particular factors of interest in investment decisions. It is an important method of assessing past performance and forecasting and planning future performance of the business or corporations or it can either be a startup.

Objectives of Financial Statement Analysis:

Financial statement analysis can be used by meeting heads to achieve the following objectives:

1. Assess Performance:

Past performance is the only way to calculate future performance. But future performances are suspected to be market-risk all the time  Therefore, a professional investor or Angel Investor is interested in the trend of past sales, expenses, net income, cash flow, and return on investment. This objective means calculating management’s past performance using all the financial data available and also indicators of future performance.

Similarly, the analysis of the current position indicates where the business stands currently.

2. Total Income, Earnings, and Growth Prospects:

The financial statement analysis helps to calculate the net earnings, profits, and growth rates in the earnings which are used by investors while comparing investment alternatives and other customers or clients for calculating the revenue generated of various business enterprises. Investors also consider the market risk or uncertainty associated with high risk.

3. Prediction of Bankruptcy and Failure:

Financial statement analysis is an important tool to find the chances of bankruptcy and failing business enterprises.

Corporate management can try making changes in financial policy, restructure the financial structure, or can proceed with liquidation to lessen the time losses.

4. Decision Of Loan Undertaken:

Financial state­ment analysis helps to determine credit risk, terms and conditions of the loan if sanctioned,  maturity date, interest rate, etc.


Different tools of Financial Statement Analysis

There are several techniques that a Financial Analyst using for analysis. But collection results from all the tools are used to lay down the final analysis. Important techniques or tools of Financial Statement Analysis are:

  1. Size Statements: Comparison of different items of the Profit and Loss Account and Balance Sheets of two or more periods is done. Separate comparative statements are done for Profit and Loss Account as Comparative income Statement and Balance Sheets.

The financial statement can be presented in the format of comparative statements such as balance sheet, profit and loss account, cost of production statement, net working capital.


  1. Comparative income Statement: Important information like Gross Profit, Operating Profit and Net Profit are noted from Comparative Size Statements. The changes or the improvement in the profitability of the business concern needs to find out throughout. Companies need to take measures based on results.


  1. Trend Ratios: The ratios of different items for different periods are find out and then compared in this trend analysis. This analysis is also called as Pyramid Method. The analysis of the ratios over some time or years  gives an idea of whether the business concern is moving upwards or downwards.


  1. The Average Analysis: When we calculate the trend ratios, these ratios are marked or compared against the industry average. They can be marked against each other in a Graph paper for further analysis. This visual makes the analysis impressive and easy to understand. Comparing a company against an industry average is important to understand where it stands.


  1. Changes in Working Capital: Net working capital is calculated by subtracting the total no of current liabilities from the total no of current assets. The increase or decrease of net working capital is calculated by maintaining the statement of changes in working capital. Liabilities – Assets are a very important formula to calculate a company’s net worth.


  1. Analysis of Fund Flow: It indicates the movement of funds, funds sources, and investment during the period under review. These visuals tell the changes in the financial structure of the company.

This refers to sources and applications of funds of the business concern for a particular period. This is important to understand how funds are utilized and where they are utilized.


  1. Analysis of Cash Flow: This is the study of the movement of cash instead of the movement of working capital. These are of two types- Actual cash flows and Notional cash flows.
  2. Ratio Analysis: Ratio analysis is a way of calculating the useful relationship between individual items (or group of items) in the balance sheet or profit and loss account.

             This tells about liquidity, solvent, profitability, etc.

           Useful for internal parties of the business concern and to external parties as well.

  1. Cost Volume Profit Analysis: This analysis tells the relationship between sales, cost, and profit. The cost is divided: fixed cost and variable cost. Cost analysis helps the management for better profit planning. There is a constant linear relationship between sales and variable cost.


Limitations of Financial statement analysis

Financial analysis is one of the beneficial ways in calculating the weaknesses and strengths of an enterprise, it is formed based on the financial data that is obtainable in financial statements. The financial analysis also has several limitations of financial statements. Therefore, the analyst must be aware of the effect of the cost changes, change of accounting policies of an enterprise, personal judgments, accounting concepts, and basic procedures, etc., The following are the limitations of financial statements::

  1. Bad Quality Of Data: Financial Statement analysis, depends entirely on the financial historic data provided by the company in its financial statements. Hence, the accuracy of the analysis depends on the completeness of the data.
  2. Standalone Analysis: The results of a company are reviewed at individual levels, hence they don’t necessarily provide the person reading with a complete picture of the position of the company in the market – in comparison with their competition and market average.
  3. Projections: The results of financial statement analysis are also several times depending on the assumptions made. Assumptions are personal and at the individual level, so they will change from person to person.
  4. Relevance: Like every data or report,  a financial statement analysis has a limited shelf life. Since we live in a dynamic world, data keeps on changing, hence Financial statements need to be made from time to time.

Different Financial  Analysis Course

Learning about Financial Analysis is a crucial step to enter this domain of opportunities. There is an absolutely amazing institute available in India which can bring a great difference in your learning territory about Financial Analysis. I am talking about SKILLFIN LEARNING. I have listed down few courses from this institute that are pathbreaking:


Master your skills in Financial Modelling with Experts. Experts provided by this course are from McKinsey.

Program Duration: 3 Months.

             Key Features: You will receive 50+ live, Online classes and also recorded videos.

             Level Of learning: Intermediate

             Learnings: Financial Models, Accounting, Ratio Analysis, DCF Based valuation,Finance


  1. FINANCIAL STATEMENT ANALYST: This one is a free course.  You will learn practical illustrations of theoretical knowledge and will create  Balance sheets and Income statements of different companies on real financial historic data.

Program Duration: Self-pace. You can pick up according to your speed of learning.

Key Features: Accounting Statements, Income statement, Balance sheets, Major link between balance sheets and Income statement.

Level of learning: Beginner. They will teach everything from scratch.

  1. BOOTCAMP COURSE: THE CREDIT ANALYST SKILLS TRAINING COURSE– This course is for individuals who want to be experts in Credit Risk Analytics to check credit risk, financial costs, ratings of any company by learning step by step frameworks and various tools.

Key Features: Lifetime Access to recorded videos, Watch videos anytime anywhere, Handson real-world projects, Expert instructor is assigned for guidance, Detailed Membership assistance is also provided, feedback on your assignments provided.

Level of learning: Beginner. Everything will be taught from scratch. Specially designed for working professionals who want to manage this course with your job.


  1. BOOTCAMP COURSE: THE VALUATION ANALYST SKILLS TRAINING PROGRAM– Enrollment in this course will help you with learning about the Intrinsic Valuation model for any MNC or large organization. You will learn from McKinsey experts.

Program Duration: 3 Months

Key Features: 50+ live classes, Recorded videos.

Level of learning: Advanced.

Learnings: Valuation Techniques, Building business model of a company, Forecasting financials for future, Discounted cash flows, Multiple Relative Valuations, Sensitivities in Financial markets, Analysing Financial Ratios.

  1. BOOTCAMP COURSE: BUSINESS FUNDAMENTALS FOR NON- FINANCE PROFESSIONAL This course is meant for people who want to master all fundamentals including skills like Finance, Accounting, and also Business Valuation.

             Learn from McKinsey Experts.

Program Duration: 3 Months

Key Features: 50+ live online classes and recorded videos. You can access them from anywhere.

Learnings: Fundamentals of accounting, Businesses Valuations, Comparison of different Financial Analysis, Building a business plan, Important trends, and ratios in Finance, How to calculate performance benchmark

Level Of Learning: Beginner


Scope of Financial Analysis

The scope is important to check how business transactions are carried out. To evaluate a company’s financial performance it requires us to:

  • Analyze all the ratios-  To check profitability, solvency, net working capital management, liquidity, and operating effectiveness of the business or company, we need to analyse the ratios
  • Compare current performance with historical data using trend analysis. This is important to understand the company’s growth.
  • Compare with peer companies in the same industry or industry averages to see how other companies are performing. This is so important to understand where your business stand compared to the industry average and peers


I would say Financial Analysis is important to understand where your business currently stands and your moving curve in the future. It determines whether you will have profits or losses. If losses have a high probability, you can minimize them by changing financial structures,  if profits, you can understand how to maintain investments to bring wealth.

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