if you’re one who consider that financial planning and financial analysis refer to same activity or their purpose are identical, than it’s the time, you should change your wrong concept since there is big difference between financial planning and analysis. Tom Colton believes that understanding the basics is most important at the forefront. Financial planning, as you know that a continual process of a business enterprise to establish a budget based information about income and expenditure both in short-term and long-term. It is the unique way to construct the capital structure of a business considering every element of assets and liabilities of a business. The job of a financial planner and his/her team is to generate the financial plan, execute budget and monitoring of the actual results which is documented for further modifications and planning.
Financial Analysis
Conversely, financial analysis is a technique that employs the output of financial planning with a view to determine profitability, stability, chance of solvency and chance of liquidity for organizations. For Individual investors and business groups interested to invest in small groups or think of big business acquisition, financial analysis is the tool that helps evaluate the financial status and information of the target company. With high level experts and seasoned financial analysts, they study the previous and current financial documents and statements such as balance sheets, report on cash flow, income statements and other factors to consider if it would be viable to invest in such companies.
Key job of Financial Analyst
If a financial enterprise or corporate business takes interest to invest in a small or medium business, its expert team of financial analysts are likely to scrutinize and study the target company’s financial statements related to past few years and current year. The whole intend of the analysis is to find out the possible strengths and weaknesses or gray areas which are documented and presented to the company owners. In this regard, the role played by analysts are extremely challenging as because with their insight they should investigate all kinds of abnormal movements in business phase and check the outline of profit earning and business cash flow. For example, while a steady and consistent growth is considered as a good performance of a company, any abrupt change and unusual ups and downs in revenue income is discouraging for investors.
Apart from analyzing balance sheet (assets and liabilities), cash flow statement is a major determining factor which indicates how cash rich is the target company. Further, financial analysts undergo a thorough process of Ratio Analysis that values the target company’s stand from one to another year. It also compares the health of the groups as against its counterpart or industry standard. There are varieties of factors like Liquidity ratio, Debt ratio and others that establishes the strength of company. As per Tom Colton that financial analysis is also helpful for small business groups for their future planning. With evaluation of its balance sheet, cash flow and income statement, owner of a company can find out the potent areas and also spot the drawbacks or weak points for necessary amendment.