Financial analysis is the examination of a business from a variety of perspectives in order to fully understand the greater financial situation and determine how best to strengthen the business.A financial analysis looks at many aspects of a business from its profitability and stability to its solvency and liquidity. For example, these elements are typically reviewed in a financial analysis:
- Profitability: The business needs to review the levels of current and past profitability and decide what they need to do to increase profitability in the future.
- Solvency: Businesses are also concerned with making sure that they do not fold because they are in debt. A financial analysis will highlight the debts they owe, and help create a pay-off plan.
- Liquidity: A business needs to understand its cash position and make sure that it has the ability to maintain a positive cash flow, while still being able to pay for what they need immediately.
- Stability: The business also wants to make sure that it is financially stable, and does not have components that could cause it to fold. They are thinking long term about the future of the company. They want to make sure they do not get into financial trouble.