Financial statement analysis, in other words financial statement analysis, is an analysis that shows the periodic performance of the business with many different methods (such as horizontal analysis, vertical analysis, trend analysis) based on the balance sheet and income statement data of the business and helps us determine the actions to be taken.
Although it is not an obligation to analyze financial statements, it is an important responsibility and this responsibility belongs entirely to the business. So who analyzes financial statements in SMEs in our country where financial literacy is very inadequate? Of course, I would love to answer this question by saying finance managers. However, according to the SME definition updated in 2022, it is understood that many businesses do not have a finance department and/or finance manager. Therefore, financial statement analysis is not performed by many businesses.
Why is it important to conduct financial statement analysis?
Financial statement analysis is the concept that you can call my right arm if you are a business owner. Financial statement analysis gives you a clear picture of your company's ability to repay debt in the current situation, the value of your company, the risks you face, your development over the years and the actions that can be taken for future periods. Of course, it is very important that you know how to evaluate these values and know what your financial statements tell you. If you don't know how to evaluate the mathematical values in front of you, they can't be more than just numbers on paper.
Who Uses Financial Statement Analysis and Why?
Financial statement analysis is used in many areas, especially company owners, lending financial institutions, investors, managers, suppliers, government agencies.
If you are a company owner, financial statement analysis summarizes the situation of your company in comparison with past periods. This summary table helps you decide whether or not to continue this business. It reveals the risk factors and you are left to create an action plan.
If you are an investor; in order to make the right decision, the company's goals and story are prioritized, but its financial statements tell you a lot of things. This helps you to invest in the right investment instrument.
If you are a manager; you will definitely need financial statements analysis in investment decisions to be taken for the company (machine investment, new project, new business lines, etc.). If you are going to invest in a facility and if you are going to use external financing rather than equity, you should analyze the existing borrowing. Managers should definitely examine financial statement analysis if they are going to make a decision on investment, financial strength and operational processes of the company.
If you are a lending institution; in a nutshell, they do financial statement analysis to make sure that they can get back the money they lend. The financial statement analysis of their companies is a serious mechanism at the credit decision point. No matter how well you express yourself verbally as a company partner, if your financial data does not reflect this, your job is very difficult.
If you are a supplier; it is a very justified reason to want to analyze financial statements. Just like banks, they will definitely want to evaluate the repayment performance of their customers to whom they provide goods/products. Likewise, it is very important whether the supplier you purchase goods from will experience financial difficulties in the supply process for the continuity of the goods.
What is the Purpose of Financial Statement Analysis and Who Performs it?
No matter who performs financial statement analysis, the common purpose of all of them is to strengthen the “decision-making” mechanism. Although this decision-making process leads to different tools for many people, the only goal to be achieved is to take the right steps.
The analysis of financial statements is usually done by banks in companies in our country only when there is a need for credit. Banks do this analysis for themselves. Because it analyzes the ability to pay the debt to its customers from financial statements. Many businesses do not analyze financial statements within themselves. Unfortunately, the analysis of financial statements is important for the company owner with the result that the bank has not approved your loan. However, it should not be forgotten that whether you use credit or not, if you are an active business, action plans for the future should be prepared in relation to past periods in order to see your future. In the meantime, a simple and only financial statement analysis is not enough. You need to apply the action plan you will create in this analysis at the highest level in line with the economic conditions. Just analyzing is insufficient. If you do not put it into practice, you will not see the benefit of the analysis.
Financial statement analysis, in other words financial statement analysis, is based on the balance sheet and income statement data of the enterprise.