Top Mistakes to Avoid When Conducting Financial Analysis.
Regardless of the industry you’re in, financial health evaluation is the key to business success. The most effective way to perform an assessment is to conduct a financial analysis. While most organizations recognize this fact and will take the time to analyze their finances, they aren’t immune to some of the common mistakes pertaining to financial analysis. Obtaining an understanding of these can help you avoid them when engaged in this critical function.
Top Financial Analysis Mistakes to Avoid
Absence of Comparative Data
Many businesses will only develop single-column reports and include no comparative data, which is why these reports tend to be less valuable. To ensure that the reader can ascertain whether the existing performance exceeds or falls short of expectations, analysts should certainly include budgeted amounts, prior-month amounts, and prior-year amounts as well.
However, this doesn’t mean you squeeze everything into a single report, which can lead to information overload. Instead, issue multiple reports. For instance, you can create two financial statements, one of which compares actual amounts to prior-year amounts and the other compares actual amounts to budgeted amounts.
Projecting Cash as a Percentage Rather than Modeling
Another common financial analysis mistake is to predict or forecast cash balances as a percentage of current assets or revenues. This is a bad idea because cash balances and any changes in them should flow from the statement of cash flows. The changes in opening and closing cash balances should be used to reconcile the discrepancies in cash balances on the balance sheet.
As a general rule of thumb, you should model a line item on income statement and balance sheet. Absolute or static values should be used represent static items, items that are not significant or relevant, and carried over items from discontinued businesses. But all other items should be modeled, otherwise any changes might be missed and will be unlikely to flow through accurately resulting in balancing issues.
Failure to Inspect Financial Statements
There’s no point in creating financial statements if they’re prone to errors, because it will only lead to improper decision-making. This usually happens when no one goes through them after they’re prepared.
Everyone who receives informational reports or financial statements should thus be trained in reading and understanding them, identifying discrepancies that significantly deviate from expectations, and escalate them to those who can properly address them.
Analyzing financial statements is also crucial for effective risk assessment so as to ensure company solvency.
Now that you’re aware of the most common financial analysis mistakes, try your best to avoid them when assessing your company’s performance. If you need help evaluating your business’s financials, reach out to Intellinz at your earliest. No matter how complex your business financials are, we can offer valuable help in assessing business health and determining how much your business is worth.