Top 3 Pitfalls to Avoid When Conducting a Financial Analysis
by Eric Sherb, on Mar 19, 2019
Whether companies are looking to grow, hire, invest or sell, an in-depth, accurate financial analysis can make all the difference. Unfortunately, far too many companies make completely preventable mistakes when it comes time to crunch a company’s numbers and figures. In this article, we’ll define financial analysis and uncover three common-but-fixable errors businesses might commit during this important process.
What is Financial Analysis?
Financial analysis is the critical process of taking a long, hard look at businesses, budgets and any other financial reports and data. During this exercise, analysts are hoping to evaluate financial performance. Usually, these analysts will attempt to determine whether a company or a market sector is sustainable or profitable enough to merit initial or additional investment or spending.
If the analysts are looking at one business in particular, they will take deep dive into cash flow, balance sheets and profit and loss reports to make similar determinations.
Financial analysts often assist with budget forecasting, financial modeling, dashboarding, key performance indicator (KPI) tracking, labor cost management, pricing analyses and investor reporting.
Businesses of all sizes—from startup to enterprise—frequently employ full-time, part-time or freelance financial analysts to help them make informed decisions about their companies’ futures. A startup may call upon a freelance financial analyst to help them prepare for a new series of funding and important meetings with potential investors. A mid-size company may utilize such analysts to help them determine whether acquiring a competitor is a sound financial decision.
What are the Most Common Mistakes Made During Financial Analysis?
Unfortunately, there’s quite a bit of room for error during this time, especially if the company conducting the analysis is new to the process. Here are three of the common pitfalls:
Conducting Analysis With Incorrect or Incomplete Data
More often than many would think, companies begin financial analysis without setting themselves up for success. Companies all too often begin their analyses with incorrect or incomplete data. This is rarely intentional, but it can have enormous implications for unsuspecting, well-meaning companies. After all, the data are what will ultimately guide analysts’ recommendations to company leadership. Misinformation can lead to inaccurate budgets, unwise investments and foolish business decisions.
For example, a medium-sized grocery chain may be considering expanding into a new neighborhood. But if the company’s income statements are inaccurate, even the most skilled financial analysts may make the wrong recommendations to the company’s decision makers. The numbers they see may indicate robust profits or a healthy next five years, when neither is in the cards.
All businesses should ensure–through good hiring, training and auditing–that best bookkeeping and data reporting practices are understood and in effect. That way, when it comes time to conduct financial analysis, the company can make decisions confidently and correctly.
Calling Upon Inexperienced or Poorly-Matched Analysts
Many businesses innocently believe that all financial analysts are interchangeable. In truth, there are many different types of analysts, from corporate financial analyst to insurance underwriter. Hiring the right person or team of people to conduct your company’s essential analysis is of the utmost importance.
For example, a new makeup brand that’s enjoyed some success as an e-commerce company may be considering brick-and-mortar distribution in a chain of department stores. This business does not need just any financial analyst to understand data. The company needs a proven financial analyst who both understands the healthy and beauty sector’s financial nuances and has helped relevant companies make similar leaps before.
Your business should not rely on the first financial analyst it interviews to make high-risk, high-reward recommendations to the company. Instead, take the time to ensure your business is matched with an analyst who has the experience and background required to understand your company and its competition.
Failing to Look at the Big Picture
Even talented financial analysts can fail to look at the big picture when making recommendations to the company that employs them.
For example, a large translation agency looking to acquire a company that sells AI-powered translation software needs more than a business-savvy financial analyst to make informed decisions about the acquisition. This business should check in with financial analysts who understand the rapidly changing tech market and are very experienced in Silicon Valley-style acquisitions.
Your business needn’t hire full-time to get a good look at the whole story. Your company can always call upon a freelance financial analyst to weight in on big decisions on an as-needed basis.
Get Commitment-Free, Top-Notch Financial Analysis
If your business is new to financial analysis or you feel you might be at risk of committing one of the aforementioned mistakes, then hiring a freelance financial expert could be a game-changer for your company. Whether you are preparing data for an analysis or ready to receive recommendations, having instant access to excellent talent for only as long as you need it can definitely make financial analysis less daunting.
At Paro, we match all sorts of companies with the most sought-after talent in the financial sector. Our freelance talent includes chief financial officers (CFOs), financial analysts and bookkeepers who have undergone our rigorous interview and testing protocols.
In particular, our outsourced financial analysis solutions can help your business properly prepare for growth, funding, mergers and other changes, big and small.
To learn more about how Paro works and how our team of experts can help change your business, request a free consultation here.