How To Write A Financial Analysis Report

If you’re into finance, you know that the right decisions can make or break a business. One of the most important skills in this field is how to write a financial analysis report. It’s great to have the ability to craft a Financial Analysis Report that’s clear, insightful, and easy to understand.

Don’t know how to write a financial analysis report? Don’t worry; we’ve got your back! This blog is for you if you’re a budding financial analyst, a business owner, or someone who wants to evaluate a company’s financial health. 

We’ll guide you step-by-step on how to write a report that’s easy to read, concise, and logically organised. We aim to make sure you get all the information you need without breaking a sweat. So, let’s get started!

What Is The Summary Of Financial Analysis?

Financial analysis involves the assessment of businesses, projects, budgets, and other financial transactions to determine their suitability and performance. It is primarily utilised to determine whether an organisation is stable, solvent, liquid, or profitable enough to justify a monetary investment. (From Investopedia – Financial Analysis)

Key Components of Financial Analysis

Financial Statements:

Financial analysis involves examining a company’s financial statements, including income statements, balance sheets, and cash flow statements, which provide a snapshot of the company’s financial position over a specific period.

Ratio Analysis:

Ratios provide a nuanced understanding of a company’s financial health, including its profitability, liquidity, and leverage.

Trend Analysis:

Evaluating financial trends is essential to forecast future performance by identifying revenue, expenses, and key metrics patterns and understanding economic factors’ impact.

Corporate Financial Analysis

Corporate finance involves analyzing within the accounting department that is subsequently shared with management to improve business performance and decision-making. This type of internal analysis may include ratios such as net present value (NPV) and internal rate of return (IRR) to determine the projects worth pursuing.

Investment Financial Analysis

In investment finance, an analyst who is not part of the company analyzes for investment purposes. 

There are two investment approaches an analyst can take: top-down and bottom-up. 

In a top-down approach, the analyst begins by identifying high-performing sectors in the macroeconomy. They then narrow down their focus to select the best companies within that sector.

A bottom-up approach involves analyzing a specific company’s financial ratios to assess its past performance and future prospects as an investment.

Types of Financial Analysis

Financial analysis can be classified into two distinct types: fundamental and technical.

Fundamental Analysis

Fundamental analysis uses financial ratios, such as earnings per share, to determine a company’s value. Analysts review the economic situation to calculate the intrinsic value of a security. This value is compared to the market price to determine if it’s overvalued or undervalued.

Technical Analysis

Technical analysis uses statistical trends like moving averages to understand the market sentiment behind price trends, assuming that a security’s price already reflects all publicly available information.

The Importance of Financial Analysis

Informed Decision-Making:

Effective decision-making relies on a strong financial analysis. It provides insights for resource allocation, investments, and future strategy.

Risk Assessment:

Financial analysts can identify potential risks by examining a company’s financial statements, ratios, debt levels, liquidity, and profitability. This helps determine if the company can handle financial challenges during uncertain economic times.

Investor Confidence:

Financial analysis is essential for investors to evaluate the feasibility of an investment. Looking closely at everything makes things clear, builds trust, and draws in investors.

How Do You Present Financial Analysis?

Presenting financial analysis effectively is important. You should know a few things to ensure that your audience understands the insights and recommendations presented in your financial analysis. Here are some tips for you on how to present a financial analysis:

Know Your Audience

Know your audience before creating your presentation. Who are they? What is their financial literacy and familiarity with your topic? What are their main interests, concerns, and questions? Customise your presentation to their needs and goals. Try to address potential objections or challenges.

Select Your Format

Choose an appropriate format for your presentation, such as slides or handouts, based on your audience, purpose, and context. Use clear language and visual aids like charts and graphs to make your content easy to understand.

Organise Your Content

A well-structured financial presentation starts with an introduction that provides background, objectives, and main findings. The body presents data and results logically, with clear transitions. Conclude by reviewing the main findings and recommendations and providing a clear call to action.

Proofread and Practice

Before presenting, rehearse and refine your content for enhanced confidence, delivery, and timing. Identify and correct errors by practising solo or with a colleague. Proofread your material, seek feedback, and utilise tools to check grammar, spelling, punctuation, and style.

Connect and Communicate

During your presentation, engage your audience using a friendly and confident tone with varied pitch, pace, and volume. Maintain eye contact, smile, and use expressive body language. Share stories, ask questions, and handle objections professionally. 

What Are The Three Pillars Of Financial Analysis?

There are three pillars of financial analysis: cash flow report, balance sheet, and income statement.

Income Statement (Profit and Loss Statement)

The income statement focuses on a company’s financial performance over a specific period, providing insight into its profitability and ability to generate earnings. 

Balance Sheet

A balance sheet shows a company’s assets, liabilities, and shareholders’ equity at a specific point in time. It offers a complete view of the company’s financial position and ability to meet its long-term commitments.

Cash Flow Statement

Cash Flow Statement helps in tracking cash inflow and outflow over a specific period. It is divided into operating, investing, and financing activities. Cash Flow Statement provides insights into a company’s cash generation and use.

Methods Of Financial Statement Analysis

Financial statement analysis is the process of evaluating a company’s financial health and performance. It involves various methods. Here are the key methods:

Ratio Analysis:

Ratio analysis assesses a company’s financial health. It analyses relationships between financial elements, profitability ratios, liquidity ratios, and leverage ratios.

Vertical Analysis:

Vertical analysis expresses each line item as a percentage of the total in a financial statement. It also provides insights into its relative significance and composition.

Horizontal Analysis:

In horizontal analysis, financial data is compared over different periods. It is used to identify trends, assess the company’s performance, and reveal areas for improvement.

Common Size Analysis:

Common size analysis evaluates financial statements by expressing each line item as a percentage of a base amount. Formula: line item divided by base item (e.g., cost of goods sold ÷ revenue).

Trend Analysis:

Trend analysis evaluates financial data across multiple time periods. It is key to identifying patterns and trends, forecasting future performance, and understanding the impact of economic factors.

DuPont Analysis:

DuPont Analysis is breaking down return on equity (ROE) into its components—profitability, efficiency, and leverage. It provides a detailed understanding of a company’s financial performance.

Cash Flow Analysis:

Cash flow analysis assess a company’s cash management abilities. It also analyzes the company’s operating, investing, and financing cash flows.

Comparative Analysis:

Companies can compare financial performance with competitors through benchmarking to identify areas of excellence or improvement.

Regression Analysis:

Statistical methods (regression analysis) are utilised to analyse variable relationships and identify factors influencing financial metrics. 

Qualitative Analysis:

Qualitative analysis complements quantitative methods by considering non-financial factors such as management quality, industry trends, and economic conditions.

What Are The Objectives Of Financial Analysis?

Financial analysis evaluates performance, informs decisions, identifies strengths and weaknesses, plans for the future, communicates with stakeholders, and ensures compliance.

Assessment of Financial Performance:

One of the major objectives of financial analysis is to evaluate the past and present financial performance of the company. It helps to gain insights into profitability, liquidity, and stability.

Risk Evaluation:

Identify and assess financial risks associated with the company’s operations, investments, and debt obligations to guide risk management strategies.

Decision Support:

It helps with risk management strategies by identifying and assessing financial risks associated with the company’s operations, investments, and debt obligations.

Strategic Planning:

It also assists in developing and adjusting strategic plans by identifying financial strengths, weaknesses, opportunities, and threats, fostering growth and sustainability.

How Do You Write A Financial Analysis For A Business Plan?

Writing a financial analysis for a business plan is easy with the proper tools and resources. A typical financial analysis includes budgeting, cash flow analysis, performance evaluation, debt obligations, cost-benefit analyses, and financial modelling. 

To help make this process simpler, here is a template that businesses can use to conduct a financial analysis:

Step 1: Budget and Forecasting

• Create an accurate and comprehensive budget 
• Review historical performance 
• Plan income and expenses for the coming years 
• Analyse data for any potential trends or patterns 

Step 2: Cash Flow Analysis

• Examine cash inflows and outflows 
• Identify potential shortfalls or risks 

Step 3: Performance Analysis

• Analyse sales trends 
• Identify new opportunities for increasing revenue 
• Examine expenses and costs associated with running the business 

Step 4: Debt Obligations

• Evaluate any debt obligations 
• Create strategies to reduce liability 

Step 5: Cost-Benefit Analysis/Financial Modeling

• Assess the impact of potential investments or changes in taxes, regulations, or other factors on future performance 
• Identify any potential risks as well as opportunities for growth and expansion. 

What Is An Example Of A Financial Analysis Report?

A financial analysis report evaluates a company’s financial performance, providing key metrics, trends, and insights to help stakeholders make informed decisions. Here’s an example of a financial analysis report’s outline:

1. Executive Summary:

Introduce the company and state the analysis objective.

A section that presents the main conclusions and suggestions.

2. Company Overview:

Company background info, history, industry, and market position.

3. Financial Statements Analysis:

• Income Statement:

Revenue analysis.

Cost of goods sold (COGS) analysis.

Gross profit margin.

Operating expenses analysis.

Net income and net profit margin.

• Balance Sheet:

Assets analysis (current and non-current).

Liabilities analysis (current and non-current).

Equity analysis.

Debt levels and ratios.

• Cash Flow Statement:

Operating, investing, and financing activities.

Cash flow trends.

4. Financial Ratios:

Liquidity ratios (e.g., current ratio, quick ratio).

Solvency ratios (e.g., debt-to-equity ratio).

Profitability ratios (e.g., return on assets, return on equity).

Efficiency ratios (e.g., inventory turnover, accounts receivable).

5. Trend Analysis:

Comparing financial performance over time.

Analyse trends and patterns.

6. Key Performance Indicators (KPIs):

Key Performance Indicators (KPIs) that are relevant to the specific industry.

Analysis of KPI trends.

7. Industry and Market Comparison:

Comparing performance with similar companies in the same industry.

Assess market trends and company position.

8. Risk Analysis:

Identifying and evaluating financial risks.

Mitigation techniques

9. Valuation:

Different valuation methods exist, such as discounted cash flow and comparable company’s financial analysis.

Implications for investors.

10. Conclusion:

Summary of key insights.

Future performance implications

11. Recommendations:

Strategy suggestions or improvements

Long-term and short-term recommendations.

12. Appendices:

Additional data, charts, and graphs support the analysis.

This is a general flexible framework, and reports are tailored according to the audience. For a practical example, check out a “Financial Analysis Report Sample” to see these elements in action.

Conclusion

Mastering “How To Write A Financial Analysis Report” is important for making informed business decisions. It involves breaking down complex data into a clear and concise story tailored to your audience. Visual aids like charts and graphs can explain numbers in real terms, and your reports can become valuable tools for decision-makers.

To excel at financial analysis business report writing, it’s important to stay updated on industry trends, practice your skills regularly, and focus on creating easy-to-understand and interpret reports. Happy analysing!