With rising tech innovations and uncertain market conditions, the corporate world is becoming more complex. Organizations are turning to digital servers and software, leading to hefty investments in information technology.
At the same time, entrepreneurs invest sums of money in analytical tools to foster research and development. Although these initiatives can drive business growth, poor planning can create financial distress in the company.
Sometimes, their wrong judgments drown them into losses, shutting down the entire business operations. After all, entrepreneurs don’t have any clue about money-related matters and investment decisions.
So, why not hire experts and let them handle the company’s finances? Financial analysts provide valuable insights into a business’s financial performance. They craft budget forecasts, set financial targets, and help owners make apt financial decisions.
In addition to improving business efficiency, they determine the most profitable ways to grow the business. Analysts can also help you explore lucrative financial securities and stocks with high-paying returns to expand your income sources.
Similarly, they disclose ways to cut-back on costs, reducing business expenses. So, are you ready to bring a financial analyst on board? In case you are still cynical about it, have a look below. Here we are revealing five ways how a financial analyst assists an organization.
Builds Financial Models
Whether you are in the banking sector or the corporate world, financial modeling is becoming an integral part of every industry. Luckily, financial analysts know how to prepare three statements and advanced models ranging from the income statement to discounted cash flows.
These cashflows account for the time value of money which means, you can determine how much the business would be worth in the future. Likewise, sensitivity and ratio analysis can assist companies with pricing policies.
Do you have an eye for detail and incredible number-crunching skills? If yes, jump on this bandwagon yourself. You can learn how to become a financial analyst and make your business flourish.
Besides preparing financial models, you can use them to make decisions about raising capital, acquisitions, selling business units, and much more. You will also learn about corporate development, equity research, and capital allocation, letting you streamline finances.
Analyzes Financial Results
Usually, companies rely on accountants to evaluate information and determine financial trends in the market. Well, an accountant’s job is to record data, calculate taxes, and prepare financial statements.
Hence, when we talk about analyzing results and evaluating performance, financial analysts show us the way. They calculate ratios from the financial statements to determine where the company stands. Standard ratio analysis includes the following ratios and metrics.
• Return on Equity: It shows how much return you are generating on the company’s invested capital. The higher the ratio, the better you are utilizing the money to make profits.
• Return on Assets: The purpose of investing in intangible and tangible assets is to generate returns. Analysts calculate this ratio to assess how much return the asset is providing and whether it was worth investing in it or not.
• Earning-Per-Share: Unsurprisingly, investors play a crucial role in every organization. This ratio calculates how much investors are earning per share. The higher this ratio, the more people would be willing to invest in the company.
Besides this, analysts calculate debt to equity, net profit margin, and many other ratios to benchmark performance against other companies. You can also compare these ratios with the industry average and see if your company is a step ahead or lagging.
Makes Forecasts & Projections
Do you have any financial goals? Setting goals create a roadmap for what the company wants to achieve while ensuring employees are on the same page. Mostly, business owners have many things in mind, such as to increase sales, boost profits, reduce expenses, etc.
Financial analysts outline these goals by preparing budget forecasts and projections. Instead of making assumptions or shooting arrows in the dark, they use regression analysis to forecast financial trends.
Moreover, analysts take a year over year growth rates to predict future growth rates. For instance, if revenue has been increasing by 5% every year, analysts predict similar trends for the coming years.
As a result, the company would have a clear goal to boost revenue by 6%-8% next year. Simultaneously, they also forecast the increase in business expenses and ensure it doesn’t impact the business profits. Honestly, without a clear set of financial goals, driving business growth becomes next to impossible.
Unfolds Investment Opportunities
Today, the volatile markets are scaling down investment activities in the business world. Entrepreneurs are afraid of evolving interest rates while the decreasing stock prices keep them away from stock markets.
Despite these uncertainties, businesses have to keep investing money to expand their income sources and mitigate the risk of losses. Financial analysts are familiar with money market funds, financial instruments, and marketable securities, offering you the best investment options.
Firstly, discuss your investment capacity and risk appetite with analysts to get accurate investment recommendations. If you are not willing to take any risk, banking products would be the best choice. Otherwise, you can invest in bonds, treasury bills, commercial deposits, or money market derivatives. Although these are quite risky investments, they offer lucrative returns until their maturity.
Moreover, financial analysts can offer valuable advice on asset purchases. After all, it is also a substantial investment. They conduct a cost-benefit analysis, evaluating whether the returns are higher than the asset’s investment cost. Analysts make all calculations on future values to account for currency depreciation and help you make a correct decision.
Initiate Cost-Cutting Methods
Unsurprisingly, every business should have full control over its finances, but sometimes, entrepreneurs overlook business costs. As a result, their profits keep decreasing despite rising sales. However, things are different when you have a financial analyst on board. They have an eye for detail which means, they can recognize additional costs and business expenses.
Firstly, they reduce supply expenses since transport costs consume a hefty chunk of profits. You can look outside your pool of vendors or find new logistics companies.
Likewise, they know how to scale down production costs. Analysts centralize the space for production to eliminate extra rental costs. They track the operational efficiency of the business to adjust and optimize available resources.
Above all, they implement practices to reduce financial expenditures. Most analysts use automated software to perform analysis, reducing the costs of paperwork. They also evaluate insurance policies to ensure the company is not over-insured or paying duplicate coverage.
Believe it or not, financial data is nothing less than a treasure for companies. And the way financial analysts process this data and give insights can be a game-changer for business. From revealing lucrative investment opportunities to preparing budget forecasts – it can strengthen the company’s financial standing.
At the same time, analysts analyze results and offer recommendations for improvements, moving the company in the right direction.