What are the Basic steps involved in the process of financial analysis under financial management?

Answer 1

Financial analysts or simply analysts are required to analyse different types of financial information and provide recommendations to their clients or end users. In that sense analysts work as an adviser who advise or recommend appropriate actions that users should take to gain favourable results. In short, many people rely on analysts and their recommendation. Because of this level importance of the work performed by analysts it is always good if we have financial statements analysis framework in order to conduct different types of analysis efficiently and effectively.

The financial statement analysis framework that is taught is more of a general nature that can be applied in multiple types of analysis. No singular entity has developed this framework rather it is a resultant of different frameworks introduced by renowned analysts for different purposes. Due to this reason it is generic in nature. The financial analysis framework has components as adapted from the frameworks and approaches suggested by different authors in their books. For example as referenced in CFA curriculum, few components of this framework has been adapted from the "Stages of the analytical review process" as suggested in Analysis and Managing Banking Risk:

According to this framework there are SIX (6)stages or phases or steps which should be followed to conduct financial statement analysis. All six steps are connected to each other in a series where the outcome of one phase will serve as an input to the next. Each phase has its own crucial importance requiring different tasks to be done in order to initiate next phase properly.

Following are the SIX steps, phases or stages in financial statement analysis framework:

1. Establish objectives of financial analysis by defining the purpose and context of financial statements analysis
2. Collect data necessary for financial analysis from different sources
3. Process the data gathered in the second phase which may range from simple sorting and adjustments to preparing common-size financial statements and graphical representation of ratios and trends
4. Conduct analysis on processed data and interpret the results
5. Develop recommendations in the light of inferences drawn from analysis conducted and report/communicate them to relevant personnel. This phase is the most critical of all from different perspectives. As it involves many responsibilities on part of the analysts that he is required to fulfill regarding the recommendations and communication of those recommendations.
6. Follow up (Review), if necessary, the information gathered, conclusions reached on the basis of analysis and recommendations made on periodic basis by repeating the all above 5 steps to check whether conclusions reached and recommendations given earlier need any revisions or not on the basis of updated information.