Financial analysis techniques for 2017

A new year marks the start of new opportunities, but it is also a time to look back and review how a business performed. Upon this reflection, it is important to ask ourselves what could have been done to improve, what was done properly and what should be removed. Doing a financial analysis can help any manager understand how to be better in the following year or period.

There are many techniques used to analyze finances, each are aimed for different objectives. However, any analysis includes having the balance sheet and the income statement. The following list includes the most commonly used techniques to analyze a financial statement.

1. Trend Analysis: also called time-series analysis. It is used to determine the way a business is most likely going to perform during a set period of time. It is based on previous financial statements in order to forecast data. It is usually done by using financial ratio analysis. For someone to calculate it, they have to do at least 2 years of it, because they need something to compare the ratios with. And also, the ideal ratio should be higher than 1.0.

2. Common Size Financial Statement Analysis: using percentages, the person analyzes both the balance sheet and income sheet. The items listed on the income statement should be stated as a percentage of sales, while the balance sheet items should be a percentage of total assets. By doing so, it becomes easier to interpret everything written down and then it is possible to compare it to the year before to see how the business is doing.

3. Percentage Change Financial Statement Analysis: it is used to calculate growth rates for income statements and balance sheets. With it, it is possible to see whether your balance sheet accounts grew or not in comparison to the income statement.