What is financial analysis and why is it crucial for business?

What is financial analysis?

Financial analysis is simply a process of examining and interpreting the financial data of the company in order to measure its performance, stableness and improvement prospects. It is based primarily on data contained in financial statements specified as balance sheet, profit and failure account or cash flow report. The aim of the analysis is to supply information that supports management, strategical planning and investment hazard assessment. In the Polish context, financial analysis is peculiarly crucial for companies from O.O., which are required to submit financial statements to the National Court registry (NRS).

Main types of financial analysis

Financial analysis includes respective key methods that disagree in scope and purpose:

• Preliminary analysis – It is simply a general review of financial statements to identify key trends, e.g. gross growth or changes in debt levels.
• Indicator analysis – It uses financial indicators specified as profitability (ROA, ROE), liquidity (current, fast) or debt, to measure the company's condition.
• Structural analysis – Focus on balance sheet and profit and failure account ratios, e.g. the share of fixed costs in full costs.
• Dynamic analysis – Researches changes in financial data over time, e.g. increase in revenues year to year.
• Causal-effectual analysis – Seeks the reasons for certain results, e.g. why the net profit fell over a given period.

Each of these methods provides different information, which together creates a comprehensive image of the situation of the company.

Data sources for financial analysis

In Poland, the primary origin of data for financial analysis is the financial statements available in the KRS, which include the balance sheet, the profit and failure account and additional information. In addition, companies can usage interior accounting reports, marketplace data (e.g. GUS reports) and competition information. Public records, specified as the KRS or the VAT register, besides let verification of the legal and taxation position of the company, which is crucial in the due diligence process.

Why is financial analysis crucial for business?

Financial analysis plays a central function in company management for respective reasons:

• Assessment of financial condition – It allows to find whether the company is viable, liquid and able to regulate its liabilities.
• Support for strategical decisions – Financial data helps to plan investments, grow into fresh markets or optimize costs.
• Minimum hazard – Analysis of debt or liquidity ratios identifies possible financial problems before they become serious.
• Enhancing credibility – Sound financial data builds trust among investors, banks and counterparties.
• Competition monitoring – Comparison of financial performance with another companies in the manufacture allows to measure the marketplace position of the company.

An example is simply a Polish company from O.O., which, thanks to regular financial analysis, identified inefficient cost processes, which allowed it to increase the profit margin by 10% over the year.

Challenges in carrying out financial analysis

Despite its value, financial analysis has any difficulties:

• Data quality – Unfair or incomplete financial statements may lead to incorrect conclusions.
• Complexity – The explanation of financial indicators requires expertise, especially for large companies.
• Ambient variability – External factors, specified as inflation or regulatory changes, can influence the analysis results.

To meet these challenges, companies frequently usage financial analyst services or specialized software that facilitates data processing.

Role of financial analysis in the Polish context

In Poland, financial analysis is peculiarly crucial due to the work to study financial statements by companies from the O.O. and another entities to the KRS. The public availability of these data enables not only an interior assessment of the company, but besides a comparison with competition or verification of counterparties. Financial transparency, supported by public registers, enhances the safety of trade and facilitates investment decisions.

Summary

Financial analysis is the foundation of effective company management, providing key information on its fitness and prospects for development. Thanks to methods specified as indicator analysis or company dynamics, they can better plan their activities, minimize risks and build competitive advantages. In Poland, public registers specified as KRS supply access to reliable data that support this process. At this point it should be noted that Bizreport allows you to easy review the financial data of companies, which makes it importantly easier to conduct analyses and business decisions.