What is a Financial Analysis of a Business?

The financial analysis of a business is a major portion of any business plan. Start-up companies need a good financial analysis to help them set initial goals and create reasonable expectations, while existing companies need financial analysis in order to compare goals with the current situation, adjust financial practices, and prepare for the future. The financial analysis of a business may be performed by internal financial personnel, such as an in-house accountant, or may be done by a third-party financial team.

Dozens of factors go in to creating the financial analysis of a business. To create a comprehensive understanding of the business's current position and future outlook, information is needed from a wide variety of sources. While some necessary information, such as market forecasting, is gleaned from outside the business, one of the best things a company can do to ensure an easy and accurate financial analysis is to be sure that all financial documents are carefully stored and organized. The more raw data an analyst has, the more telling the analysis may become. Keeping documents organized and dated also helps the analyst or analysis team save considerable time and effort that might get wasted hunting for dates and other information.

The goal of the financial analysis of a business is to present an explanation of how well the company is doing financially. This includes factors such as the profit of the business, its stability in the marketplace, and its debt-to-asset ratio. These factors may be weighted depending on the type of business and the future plans of the company; a company with a high profit record but an enormous debt load, for instance, might decide to refrain from expanding until some of its debts are brought under control. On the other hand, a company with a low debt load that is believed to be extremely stable in the market might choose to expand even if profits are only moderate.

The financial analysis of a business becomes more complex if the company is new. With no profit or cash flow record to rely on, the analysis necessarily deals more with speculation than with fact. Some of the important considerations in start-up analysis include estimations of the market and the economy as a whole, the perceived demand for the goods or services provided by the business, and what level of income the business will need to generate to break even in the first few years. In addition, it may be important to consider the performance record of companies that offer similar products in order to get an idea of the potential future. If the company is offering something totally new and unique, however, the financial analysis may become almost entirely speculative.