The thing with Financial Statement Analysis is that it is exactly what it sounds like. Wait, what? Yes, in this type of analysis, there is everything involved related to a company’s financials to have a good idea of how well a company or business is doing financially, you know? We are talking about things like looking at income statements, checking balanced sheets thoroughly, looking at cash flow statements, and whatnot. But why is all of this done in the first place? That’s mainly to gather information about the actual revenue, profits, assets, and liabilities of a business or company out there. And what good are these things? Well, for starters, a company by diving deep into such data can make even better decisions that are not merely any predictions but are based on actual data.

Not just that, if a company or business wants to please investors, well, yes, having done a thorough financial statement analysis can give them a clear picture of how well the company is doing. Let’s have a look at the advantages and disadvantages of financial statement analysis, so you can understand it in a much better way.

Advantages of Financial Statement Analysis

1. Spotting Trends and Patterns You Didn’t Know Existed

Analyzing financial statements is one of the best ways to make sure that the people involved are not only looking for the obvious but are also finding hidden gems, you know? Like, it is about the financial figures and information in the financial report of the organization. The analysis can also integrate years of data to identify possible working capital trends. For example, this could happen when the profit levels show an increase during the introduction of a new product and then later decline.

2. Budgeting Just Got a Whole Lot Easier

Furthermore, another significant advantage of this type of analytical process is the ability to ensure strategic goals are met through better budget planning, how does that actually work? Well, you see, companies can assess how much cash is available for future projects like events and initiation of various new products by evaluating prior financial reports and identifying the right times to initiate the work. As a result, they can avoid costly mistakes by properly allocating their financial resources.

3. A Full Checkup on Your Company’s Health

By way of financial statement analysis, companies get an accurate view of their finances, but how though? Well, by looking at indicators such as liquidity ratios, debt and equity ratios, and any other metrics, the organization can get to know whether it is making enough profits to satisfy its obligations. The analysis can determine, in addition to this, whether the entity has enough cash flow for daily operations by the liquidity of its assets or the capability of its capital to pay current debts.

4. Transparency That Builds Trust

Time and again, detailed financial breakdowns have been crucial to investors and lenders in deciding on their commitments, and that’s kind of an advantage of considering Financial Statement Analysis. A company that provides detailed and correct financial details to stakeholders shows them its honesty, thus creating their faith in its long-term reliability and opportunities for growth, you know?

5. Catching Risks Before They Turn Into Disasters

Relying on financial statement analysis as an early warning signal for distress is a good business strategy. Like, a company can indeed cut costs or look for additional income if sales are not growing while expenses rise. Early detection of such ‘red flags’ can save a company from major losses later and keep it in good shape.

6. Knowing How You Stack Up Against the Competition

In the end, financial statement analysis makes it possible for a management team to benchmark the performance with industry competitors. In particular, the analysis of the financial data of similar firms not only measures a company against them but also indicates the potential areas for improvement so that it will continue its competitive position in the market.

Disadvantages of Financial Statement Analysis

1. Only Tells You About the Past

One of the primary drawbacks of financial statement analysis is its reliance on the past only, you know? Just so you know, these documents show the previous operational trends, which signifies that they cannot forecast the results for the forthcoming periods. Although they inform you about the previous state of the firm, they cannot stand as a guarantee of the future having the same results.

2. Dependent on the Market Conditions, Way Too Much Actually!

Financial statements are highly determined by market conditions at the time of reporting. For example, if in a certain year, a company made large sales, it does not mean that in the next year, it will happen similarly, particularly in an environment where the same products are offered by competitors with better features, and that’s how it is.

3. Just A Snapshot in Time, Not the Full Picture

Financial statements give a glimpse of how the firm performed at that specific moment, like at the end of a financial year. This means they just point out how the company was at that particular time and do not provide information on the long perspective. So yes, keep in mind that a single statement does not indicate whether a company is in an upward or downward trend without past reports being compared.

4. Ignores the Human Side of Things

As you might have seen already, financial statement analysis is an area that greatly focuses on the financials & numbers with very minimal or no regard to the quality aspects such as client happiness, brand values, or even employee well-being. In general, these factors can heavily impact company success but are still lacking in their appearance on financial records. Because of this, the outcome of only being dependent on financial statements is that one gets kinda a skewed and very narrow view of the business or company itself.

Conclusion

That’s all. It should be much easier for you to understand why there is even a need for financial statement analysis, right? And yes, it is considered or done more often than you think, not just to please the investors, but to have a good idea of how the business or company is actually doing financially.