TECHNIQUES FOR CALCULATING & ANALYSING FINANCIAL DATA Essay Example

Techniques for Calculating & Analyzing Financial Data

Techniques for Calculating & Analyzing Financial Data

Introduction

Financial calculation and analysis are two important aspects of financial data in a firm. The techniques used for data calculation and analysis in a firm are diverse, and each depends on the type of data available. These techniques lead to the relationship between the income gained in the firm and the balance sheet elements. The primary importance of financial data calculation and analysis in the firm is the identification of the source of weaknesses and also identifying the strengths of the firm through indicators. Financial calculation and analysis lead the firm to the knowledge of the past, the current and the future financial status and hence informs the company on the next step to take.

External Analysis

Financial data analysis in a firm can be done through numerous methods, with every each of them suitable for a particular type of data. The external analysis is best suited for the financial data which have been published. The data may be released following the inability to access the information concerning accounting in the firm. The published data that is analyzed externally may be from the banks, the creditors, stockholders and sometimes the data may be from the public[ CITATION Sye15 l 1033 ].

Time Series

Time series is used in the calculation and analysis of data. The technique is also referred to as the trend analysis method as it leads to the comparison of data from time to time. Both the historical financial data of the firm as well as the forecasted data about the firm financial aspect is, hence of great essence in the trend analysis technique. The data utilized is extracted from the information contained in the financial statements. When the ratios from the past are calculated, they are compared to the current ratios. Then, a decision is reached by the organization on the ways to strengthen the future relationship of ratios of the items in the financial statements. When the data calculation and analysis is done in a series of times, a trend is created which can be used as a financial reference by the firm. Therefore, the method is important in informing the firm about the financial situation; whether it is becoming better or worsening over the years.

Ratio Analysis

The third means of financial data calculation and analysis is the ratio analysis, and has been used for an extended period to calculate and analyze financial data. The technique is also essential where the primary indicator is identified as well as its effect on the financial status of the firm. The indicators are especially of importance when items are being developed on the income statements as well as the balance sheets. A rational relationship of the elements can be drawn from the ratios. Some of the indicators in the ratio analysis include the solvency, profitability as well as the liquidity of the business. Through ratio analysis as a technique for computing a company’s financial data, financial statements are easily comprehended. Additionally, the technique exposes the alterations on the financial situation of the firm. The weaknesses can hence be indicated as well as the strengths of the financial status of an entity[ CITATION Lor13 l 1033 ].

Common Size Statements

Fourthly, financial data can also be computed and analyzed through common size statements. The figures of the financial data are often changed into percentages. The total balance sheet represents 100 during the computation of the data. The items on the balance sheets are conveyed as the ratio of every asset to the total assets. The rate of each liability, on the other hand, is expressed about the total liabilities. The relationship of every component to the total is hence expressed by the common size statement techniques of financial data calculation and analysis.

Change of Working Capital Statements

The primary objective of this technique is to get data which is linked to the working capital. When the total of the present liabilities is subtracted from the total assets that are currently in the firm, the net working capital is achieved. The change in the working capital statement conveys the relationship between two different financial phases in the firm.

Comparative Financial Technique

The comparative financial technique is an important method which shows the comparison of two different financial statements. It analyzes data horizontally hence; the technique is applied to balance sheet and income statements. When the data is compared with the current period to the prior period, objective financial information about the firm is gathered. Drawing conclusion and review of the performance of the firm operation is enabled by the income statement comparison. The impacts of the operations on the liability and assets is indicated by the balance sheet which expresses the changes in the financial situation in the firm during that period and the earlier financial situation of the firm. Comparative financial statement leads to the determination of the absolute change from one phase of the company to the other[ CITATION Rue12 l 1033 ].

Internal Analysis

Internal analysis of the financial data from the company’s financial management team is the seventh technique. The activities are mainly conducted by the accounting and the financial departments. The technique is informative to the organization. The results obtained from the financial data analysis are usually presented by the firm management. According to the outcome, the firm is informed on the necessary decisions to make.

Horizontal Analysis

The technique involves analysis of data obtained from the financial analysis for a period. For instance, in many organizations, the horizontal analysis leads to an annual comparison of the financial statements. Horizontal analysis is useful in the process of decision making in the firm due to the changes that occur from one year to the other. The horizontal analysis of financial data is hence referred to as the dynamic financial data analysis technique as results vary from one period to the other[ CITATION Edo10 l 1033 ].

Vertical Analysis

The last method is the vertical analysis of financial data of a particular company, which applies to all types of organizations. The financial information to be analyzed through vertical analysis has to be within a period of less than a year. Since there are no data changes which are experienced in this technique, it is referred to as the static analysis of financial information.

Conclusion

In brief, financial calculation and analysis in a firm is a continuous process. The techniques used to apply to all businesses, but depend on the type of financial data that is being analyzed. The data calculated and analyzed in a firm includes data from the balance sheet, income statement, statement of earnings, cash flow and change in financial position statements. The methods inform the firm of the changes that have been taking place in the company’s financial aspect over specified periods for example within a year in dynamic analysis. Rational decisions for sustainable financial strength of the enterprise can, therefore, be reached due to the information that is revealed after the financial analysis. The capacity of an entity to be successful regarding income, as well as the ability to manage short-term and long-term growth in a sustainable manner, is fostered by the financial calculation and analysis methods utilized.

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