Analysis is a KeY Tool to Pointing Out A Financial Issue
Beyond the belief of many business owners who hire employees with 20+ years of experience, not all professionals are skilled to analyze data without management direction. The skill of analytics has been identified as beyond necessary as well as critical to the compliance and financial position of an organization. The analysis of financial data employs various techniques to emphasize the comparative and relative importance of the data presented and to evaluate the position of the firm. These techniques include ratio analysis, common-size analysis, review of descriptive material and comparison of results with other types of data. The information derived from these types of analysis should be blended to determine the overall financial position.
The American Management Association research has shown that analytics are important today and will be even more important in the future."Overall, 58% of company leaders say analytics are important to their organizations now, and 82% say they will be important in five years. Less than 1% of companies say analytics will not be important to their business in five years, an unambiguous indication that analytics will be a ubiquitous part of the business world by the end of the decade." Business owners must remember that financial statement analysis is a judgmental process. One of the primary objectives is identification of major changes (turning points) in trends, amounts, and relationships and investigation of the reasons underlying those changes. Often, a turning point may signal an early warning of a significant shift in the future success or failure of the business. Knowing this, ignites the importance of establishing extensive policies and procedures for staff professional development and process improvements.
It's a fact that absolute figures or ratios appear meaningless unless compared to other figures or ratios. Having 60% of total assets composed of buildings and equipment would be normal for some companies but disastrous for others. One must have a guide to determine the meaning of the ratios and other measures. One type is trend analysis which studies the financial history of a business for comparison. By looking at the trend of a particular ratio, one sees whether that ratio is falling, rising or remaining relatively constant. The factors help detect problems or observe good management.
A great example of the month to month financial comparison analysis is provided below by Illinois Small Business Development Center.
A businesses ratios are more than just numbers to your investors and banks and should mean the same to a companies professional staff. Take the first step in improving the business culture plus the professional skills and knowledge base of staff which can lead to the prevention of costing companies millions due to preventive errors or non-compliance matters by developing an extensive reference guide tool.
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