Financial reporting is an essential part of the accounting & reporting structure of an organization as it serves the financial planning, analysis, benchmarking and decision making within that organization. As an accounting professional, it is very important for you to know how to analyse financial statements effectively. This will require an understanding of the following areas:

  • The structure of the financial reports
  • The economic attributes of the industry in which the organization operates
  • The strategies the organization pursues to differentiate itself from its competitors
financial statements analysis

Now let’s take a look at some steps that will help you with an effective analysis of your financial statements to help you better in future planning and decision making:

  1. Spot the industry economic traits

It is essential to govern a value chain analysis for the industry including the chain of activities involved in the creation, manufacture and distribution of your organization’s products and/or services. Factors like analysing your competition and the review of economic attributes are normally used in this step.

2. Evaluate the quality of your financial reports

Review your financial statements within the context of the applicable accounting standards. When examining the balance sheet accounts, common issues such as recognition, valuation, and classification need to be addressed properly for a proper evaluation. You should identify if a balance sheet is a depiction of your organization’s economic condition or not.

3. Identify company strategies

The way you look at the nature of the product/service that your organization offers plays a crucial role in the financial statements analysis. While doing so, make sure to keep in mind the uniqueness of the product/service being offered, level of profit margins, creation of brand loyalty and control of costs.

Additionally, things like supply chain integration, geographic and industry diversification, etc. should also be taken into consideration.

4. Examine the current profit, loss, and risks of your organization

Common analysis tools are vital financial reports elements related to liquidity, asset management, profitability, debt management, and risk/market valuation. Now, as far as profitability goes, the following questions should be asked:

  1. How profitable are the company operations relative to its assets?
  2. How profitable is the company from the perspective of the equity shareholders?

It is also very important to analyse any financial statement element in a comparative way – By evaluating the current trends in relation to those from earlier periods or relative to other industry averages.

5. Prepare forecasted financial statements

This is one of the more challenging things to do when we compare with the other tips above, but anyways, accounting professionals should make reasonable assumptions about the financial future of the organization (and its industry), so that it becomes easier to determine how these assumptions would impact both the cash flows and the funding.

A well planned financial statement analysis is very important if you’re trying to scale up your overall financial reporting infrastructure. Additionally, accounting irregularities should also be taken into consideration to understand how different types of manipulations occur and more importantly, how to detect them.

Tally Web by Imbibe Tech is the ideal finance reporting tool for your business as it optimises your account reporting process by enabling automatic reports consolidation, real-time synchronization and much more. Contact Imbibe Tech today to know more.

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