Financial Analysis Decisions are important choices made by companies about how their money is obtained, spent, and invested. The options that lead to these decisions are researched by financial analysts. The analyst will make observations and calculations, and then recommend the best course of action. Having a systematic approach to making these decisions can be essential to maximizing a firm's profitability. With consistency, an analyst can compare his or her facts and figures with less likelihood of error.Six steps to follow in an Analysis decision:
1. Define The Purpose Of The Analysis Why are you doing an analysis in the first place? Without a clear goal to be achieved, it is difficult to focus your analysis on the right information.
Click HERE to view blog entry about the purpose of performing an Analysis.
2. Create An Overview Of The Company or Project Defining the industry a company is part of is the first part of an overview. Once you identify a firm's competitors, an analyst should look at what business strategies the firm is taking to increase market share. If an analyst is looking at projects to invest in, identify all of the options that could be made and the possible results of each option.
Click HERE to view blog entry about the Overview.
3. Quantitative Analysis Using ratios, models, and forecasts will give an analyst solid numbers that can be used to compare firms, projects, and costs. An analyst can look at these numbers to eliminate several of the less desirable choices.
Click here to view my blog entry about the Quantitative Analysis.
4. Accounting Analysis Further number crunching may be required in a more rigorous examination of the remaining choices. If you are looking at companies to invest in, consider checking the notes in the annual report. Look for similarities and differences between peers in the firm's industry. Check to see if there is anything that could increase risk. In examining projects, check any contracts or possible industry problems that could change a project's profitability in the future.
Click here to see my post about Accounting Analysis.
5. Comprehensive Analysis An analyst should summarize the results from the Quantitative and Accounting Analysis. Check the newspaper and online search engine for any last minute changes or headline risks. Create a report comparing the best possibilities that others can base their decisions on. This report can also be used to review decisions later to judge their successes.
Click HERE to view my blog about the Comprehensive Analysis Summary.
6. Financial Analysis Decision The decision maker reads the analyst reports, compares the choices, weighs the options, and makes the best decision.
Click HERE to view my blog post about the Decision.
This approach to Financial Analysis decision making is not original. I borrowed most of these ideas directly from "Financial Analysis: A User Approach" by Gary Giroux. You can see some of his other work by visiting this page HERE. I still have much to learn about analysis, and would appreciate any comments that readers would like to leave. Let me know if you have a different approach. Thank you for visiting.
***UPDATE***
Here are the links to all of the posts in this series.
Financial Analysis, Analyst, Analysis Decisions, Decision Making
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