I think anyone in finance division can do financial analysis

Let me show you how ???

I asked ChatGPT3.5, “What is financial analysis in simple terms?” and this was the response:

“Financial analysis is the process of evaluating the financial health and performance of a business or investment by examining its financial statements, ratios, and other relevant data. It helps assess profitability, stability, and growth potential, aiding in decision making and understanding the financial picture of an entity”.

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When you read that that small paragraph, these buzz words stood out right, performance, financial statements, ratios and profitability?

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If we look at this on lamest terms, it boils down to financial analysis is scrutinising financial data for desired outcomes. These are 4 key steps I use for any financial analysis.

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1.??? Desired outcome – I worked on audit environment, and I have dealt with multiple tasks where I had to do analytics on financial statements and specific accounts. That is where I learnt that defining the end goal of my analysis is essential and set a smooth foundation for the analysis journey at hand.

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That is key, you need to first understand what the desired outcome from the analysis, because this will guide you on what you should look at, what data you need, what possible calculations you should perform and other factors to consider.

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For example: if you are a marketing leader in a company and you want to assess the impact of a new marketing strategy on a product line. Now the desired outcome is whether the new marketing strategy have a positive or negative impact on the product line revenue.

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2.??? Financial data – once you establish your desired outcomes, you need to collect all data that will assist you in your financial analysis.

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For our example above, you would have to collect data such as product line revenue and marketing expense monthly data. If there is comparable data, it enhances the results of your analysis because you can compare and be able to derive valuable insights.

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3.??? Design & perform your analysis – now you have the data, what can you do with it? You need to look at your data with desired outcome in mind and come up with what ratios/visuals would get me the answers I need.

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For our example above, you will look at something like Marketing expense/Revenue p/m and compare this with prior year. You can also put your data on visualisation such as line graph to check if there is a link between trends of revenue & the expense (For example where there is high spending is it accompanied by increased sales?). I am just giving a typical example; hope you get the logic.

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4.??? Results review and limitations – Any analysis is not perfect. With your desired outcome at mind, look at your analysis and ask yourself the desired outcome question again. Do you have an answer? Because analysis is based on experience and judgment, you need to factor in limitation or what is referred to as qualitative factors.

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Back to our example, is the new marketing strategy having positive or negative impact on the product line revenue? Let’s assume the calculations and visualisations are showing positive outcome, now you factor in limitations before you conclude your analysis. Limitation might be things like unassessed impact of discounts offerings, margin increases, stores expansion, etc. You need to understand how this impacts your analysis so that your audience are well informed that yes, we see positive outcome, but these factors also played a role and due to limitation, you could not factor them into your analysis calculation. Try to assess & explain the impact of the limitation as much as possible.

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It does not matter whether you are in audit, accounting, insurance, marketing, strategy, you name them departments, it always boils down to desired outcome I am looking for.

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I hope this will make you enhance your analysis approach. Let me know what you think on the comments, I am also keen on learning how you approach financial analysis.