From Data to Decisions: Exploring Types of Financial Analysis

In a startup’s high-stakes environment, grasping a company’s financial analysis isn’t just a task. The real challenge, however, lies in accessing and interpreting real-time financial data, often scattered across multiple systems like spreadsheets and outdated accounting software. 

The pressure to ensure data consistency and accuracy, especially during month-end close and variance analysis, adds another layer of complexity. Spending too much time on manual data compilation and analysis and inefficient financial processes leads to delays in reporting and difficulty in accurately forecasting and budgeting due to a lack of actionable insights and real-time financial visibility.

In this article, we’ll discuss how different financial analyses of a company empower you as a CFO to transform challenges into opportunities. Don’t just manage your numbers. Let them drive your strategic vision through effective financial analysis of a company.

13 Types of Financial Analysis

By gaining expertise in various forms of financial analysis, you can identify key opportunities and address potential risks before they impact your company’s performance. Here are the must-know types of financial analysis that can transform your business strategy:

1) Income Statement Analysis

It allows you to break down the revenue and expenses to see how well your business performs over time. There are two main methods of Income Statement Analysis:

 1. Vertical Analysis:

Vertical Analysis compares each line item on the income statement as a percentage of total revenue. This approach helps you understand the proportion of revenue consumed by various expenses, making it easier to identify areas where costs might be too high or margins could be improved.

Example:

Imagine your company’s total revenue is $1,000,000, and your cost of goods sold (COGS) is $400,000. Using Vertical Analysis, you would express COGS as a percentage of revenue:

COGS Percentage = (Total Cost of Goods Sold / Total Revenue) × 100Example: If COGS = $400,000 and Revenue = $1,000,000

This means that 40% of your revenue covers the costs of the goods you sell. If this percentage is higher than industry benchmarks, it might indicate inefficiencies in production or supply chain management, signaling an area that needs attention.

2. Horizontal Analysis:

Horizontal Analysis compares financial data across different periods, typically year over year (YoY). This method helps identify trends, growth rates, and changes in financial performance over time.

Example:

Let’s say your revenue last year was $900,000, which has grown to $1,000,000 this year. Horizontal Analysis would focus on the year-over-year change in revenue:

• Last Year’s Revenue (Old Revenue): $900,000
• This Year’s Revenue (New Revenue): $1,000,000

Calculation:

An 11.1% growth in revenue is a positive sign, indicating that your business is expanding. 

Here’s a general scale to understand revenue growth in terms of business expansion:

• 0% to 5% Growth: Minimal Growth
• 5% to 10% Growth: Moderate Growth
• 10% to 20% Growth: Strong Growth
• 20% to 30% Growth: Rapid Growth
• 30%+ Growth: Explosive Growth

The Horizontal Analysis shows a significant increase in COGS, while the Vertical Analysis indicates COGS consumes a higher percentage of revenue. This combined insight might prompt you to investigate why costs have risen faster than revenue, possibly leading to strategies for cost reduction or process improvements.

2) Balance Sheet Analysis

Balance sheet analysis helps you evaluate whether your business has the necessary resources to meet its obligations and continue operating efficiently. By analyzing how effectively you use assets to generate revenue. 

1. Evaluating Operational Efficiency via Balance Sheet Metrics.

Evaluating operational efficiency shows how well your company uses its resources to generate revenue and manage expenses. It is often assessed using specific balance sheet metrics that provide insight into how effectively a company manages its assets and liabilities.

•  Asset Turnover Ratio:

One of the primary metrics used to evaluate operational efficiency is the Asset Turnover Ratio. This ratio measures how efficiently your company uses its assets to generate sales. It is calculated as: 

For example, if your company has net sales of $500,000 and average total assets of $250,000, your Asset Turnover Ratio would be 2. This means that your company generates $2 in sales for every dollar invested in assets. A higher ratio indicates better efficiency, suggesting that your company effectively uses its assets to produce revenue.

• Inventory Turnover Ratio:

Another important metric is the Inventory Turnover Ratio, which measures how quickly your company sells and replaces its inventory. The formula for this ratio is:

For instance, if your cost of goods sold (COGS) is $400,000 and your average inventory is $100,000, your Inventory Turnover Ratio would be 4. This implies that your inventory is sold and replenished four times. A higher ratio suggests efficient inventory management, indicating that your company is not overstocking and is efficiently converting inventory into sales.

• Accounts Receivable Turnover Ratio:

This metric evaluates how efficiently your company is collecting payments from customers. It is calculated as:

For example, if your net credit sales are $600,000 and your average accounts receivable is $150,000, your Accounts Receivable Turnover Ratio would be 4. This means you are collecting your receivables four times a year, which is a good indicator of efficient credit and collection processes.

2. Key Ratios:

• Liquidity Ratios: These include the Current Ratio (Current Assets / Current Liabilities) and Quick Ratio ((Current Assets – Inventory) / Current Liabilities), which measure your company’s ability to meet short-term obligations. Higher ratios generally indicate a more liquid and financially secure business.
• Leverage Ratios: The Debt-to-Equity Ratio (Total Debt / Total Equity) helps assess your company’s use of debt to finance its operations. A lower ratio suggests a more conservative financial structure, reducing the risk associated with high debt levels.
• Operating Efficiency ratios: They evaluate how efficiently your company uses its resources to generate revenue. The Asset Turnover Ratio and Inventory Turnover Ratio are included in operating efficiency ratios.

3) Cash Flow Statement Analysis

It provides a clear view of how cash moves in and out of your business, helping you manage liquidity and plan for the future. As a CFO, being aware of your cash flow ensures you can make confident decisions that align with your company’s financial health and long-term goals.

1. Cash Inflows and Outflows

• Inflows of Cash: This includes all the cash the company receives during a specific period. Common sources of cash inflows are:

1. Sales revenue: Money received from selling products or services.
2. Investments: Income from investments, such as interest, dividends, or the sale of assets.
3. Loans: Funds received from borrowing money or issuing debt.
4. Equity: Money raised from issuing shares or receiving additional capital from owners.

• Outflows of Cash: This includes all the cash the company spends during a specific period. Common types of cash outflows are:

1. Operating expenses: Payments made for day-to-day operations, such as salaries, rent, utilities, and raw materials.
2. Capital expenditures: Money spent purchasing long-term assets, such as equipment, property, or machinery.
3. Debt repayments: Cash used to pay off loans or other financial obligations.
4. Dividends: Payments made to shareholders as a return on their investment in the company.
5. Categories Of Cash Flow Statement

The Cash Flow Statement is divided into three primary sections, each providing a detailed look at different aspects of your company’s cash movements:

• Cash from Operations: This section tracks the inflows and outflows related to your company’s core business activities. It includes customer cash and payments for operating expenses like salaries, rent, and supplies. For example, if your business receives $500,000 in revenue and spends $300,000 on operating costs, your net cash from operations would be $200,000.
• Cash Used in Investing: Here, you see the cash flows associated with purchasing or selling long-term assets, such as equipment or property. If your company buys new machinery for $100,000, that amount would be recorded as an outflow under investing activities.
• Cash from Financing: This section captures cash flows from activities that fund the company, like issuing new shares, taking on loans, or repaying debt. For instance, if your company secures a $150,000 loan, this amount would be recorded as an inflow, while repaying $50,000 would be an outflow.

Want to learn more about managing your cash flow statement? Check out our detailed guide on cash flow here.

With a clear view of your cash flow, it’s time to focus on how well your company is turning revenue into profit. Let’s move on to profitability analysis.

4) Profitability Analysis

Profitability Analysis helps you gauge whether your company’s income surpasses its expenses and how effectively it’s using its resources to create profits. For CFOs, assessing profitability isn’t just about tracking numbers—it’s about ensuring your financial strategies align with your business goals.

Measuring Profitability

1. Gross Profit Margin: This financial metric measures the percentage of revenue remaining after subtracting the cost of goods sold (COGS). It helps you understand how efficiently a company produces and sells its products.

Where:

• Gross Profit = Revenue – Cost of Goods Sold (COGS)
• Revenue = Total sales or income from selling goods or services

Example

Imagine your company has:

• Revenue: $1,000,000
• Cost of Goods Sold: $600,000

Gross Profit:

      This means that for every dollar of revenue, 40 cents is gross profit. 

2. Net Profit Margin: This financial metric measures how much of a company’s revenue remains as profit after deducting all expenses, taxes, and costs. It reflects the percentage of revenue that represents the company’s net income, providing insight into its overall profitability.

Example: Suppose your company has a net income of $100,000 and a total revenue of $1,000,000. To find the net profit margin:

3. Return on Equity (ROE): This financial metric measures how effectively a company uses its shareholders’ equity to generate profit. It reflects the return shareholders earn on their investment in the company.

Here’s a quick breakdown of ROE:

Formula:

Net Income: The company’s total profit after deducting all expenses, taxes, and interest.

Shareholders’ Equity: The residual interest in the company’s assets after deducting liabilities. It’s essentially the company’s total value that belongs to its shareholders.

Example Calculation:

Suppose a company has:

• Net Income: $150,000
• Shareholders’ Equity: $500,000

The ROE would be:

Higher ROE: Indicates that the company is efficient in generating profits from its equity. It’s generally a positive sign for investors.

Lower ROE: This might suggest that the company is not effectively utilizing its equity, which could concern investors.

5) Leverage Analysis

Leverage analysis helps you evaluate how much debt your company uses to finance its operations. This is important because the right level of debt can enhance returns, but too much can increase risk. Let’s break down the key aspects of leverage analysis to help you make informed decisions about your company’s financial health.

Key Ratios in Leverage Analysis

1. Debt-to-Equity Ratio
   This ratio compares a company’s total debt to its shareholders’ equity. It shows how much debt is used relative to equity, indicating the level of financial risk.
   • Formula:
   • Example: If your company has $500,000 in debt and $1,000,000 in equity, the Debt-to-Equity Ratio is 0.5, meaning that debt is half of the equity.
2. Interest Coverage Ratio
   This ratio measures how easily a company can pay interest on its outstanding debt with its current earnings.
   • Formula: 

• Example: If EBIT is $200,000 and interest expenses are $50,000, the ratio is 4, indicating that earnings can cover interest expenses four times over.

6) Growth Analysis

Growth analysis helps you gauge how well your company is expanding and adapting to market demands. This section will show you how to assess your company’s growth and leverage this information for better decision-making.

 Assessment of the Company’s Growth Over Time.

Assessing your company’s growth over time provides a clear picture of how well your business is performing and adapting to market conditions. This aspect of financial analysis allows you to measure progress, identify successful strategies, and spot potential areas for improvement. 

Key Metrics for Growth Analysis

• Percent Change in Financial Metrics: To understand growth, look at how your financial metrics change over different periods. For example, if your revenue grew from $100,000 to $120,000 over a year, your growth rate is 20%.

This metric shows how much your revenue has increased over a specific period, giving you insight into overall growth.

• Revenue Growth Rate: Measure how quickly your revenue is increasing. For instance:

Revenue Growth Rate =

If your revenue increased from $150,000 to $180,000, the calculation would be:

This will show you whether your revenue is growing steadily or if there are fluctuations.

• Profit Growth Rate: Similarly, calculate your profits’ growth rate to assess how effectively your company converts revenue into profit.

7) Liquidity Analysis

Understanding liquidity ratios helps you, as a CFO, manage cash flow efficiently and avoid potential financial pitfalls. Focusing on key liquidity metrics ensures that your business maintains enough liquidity to handle day-to-day operations without unnecessary strain.

What is Liquidity Analysis?

Liquidity analysis evaluates a company’s ability to cover its short-term liabilities using its short-term assets. This is essential for maintaining smooth operations and avoiding cash flow issues that can disrupt your business.

Key Liquidity Ratios

1. Current Ratio
   • Formula: Current Assets / Current Liabilities
   • Example: If your current assets total $150,000 and your current liabilities are $100,000, your current ratio would be 1.5. This means you have $1.50 in assets for every dollar of liability.
   • Significance: A current ratio above 1 indicates that you can meet your short-term obligations with your available assets. However, an excessively high ratio may suggest underutilized resources.
2. Quick Ratio (Acid-Test Ratio)
   • Formula: (Current Assets – Inventory) / Current Liabilities
   • Example: With current assets of $150,000, inventory of $50,000, and current liabilities of $100,000, the quick ratio is 1.0. This means you can cover your liabilities with your most liquid assets.
   • Significance: The quick ratio is a more stringent measure than the current ratio, excluding inventory, which may not be as easily liquidated.

8) Solvency Analysis

 Solvency analysis evaluates your ability to meet long-term obligations, providing insight into your company’s financial strength and risk profile. This analysis helps you address key concerns, such as managing debt levels and planning for future financial needs.

Assessing Long-Term Financial Stability

To gauge your company’s solvency, focus on these key metrics:

1. Debt-to-Asset Ratio

Example: If your total liabilities are $500,000 and total assets are $1,000,000, your ratio would be:

2. Debt-to-Equity Ratio

Example: With total liabilities of $300,000 and shareholders’ equity of $700,000, your ratio would be: 

9) Efficiency Analysis

Focusing on efficiency helps pinpoint areas where your company can optimize its operations and enhance profitability. Accurate efficiency analysis can identify which resources are underperforming and make strategic adjustments to improve overall performance.

Key Ratios Efficiency Analysis

1. Asset Turnover Ratio
   • Definition: Measures how effectively a company uses its assets to generate sales.
   • Formula:

​

• Example Calculation: If your company has net sales of $1,000,000 and average total assets of $500,000, the asset turnover ratio is: 

• Interpretation: A ratio of 2 means your company generates $2 in sales for every $1 of assets. This indicates the effective use of assets in generating revenue.

2. Inventory Turnover Ratio
   • Definition: Assesses how quickly inventory is sold and replaced over a period.
   • Formula: 

​

• Example Calculation: With a cost of goods sold of $400,000 and an average inventory of $100,000, the ratio is: 

• Interpretation: An inventory turnover ratio of 4 indicates that inventory is sold and replaced four times a year, reflecting efficient inventory management.

10) Valuation Analysis

When you’re analyzing a company’s financials, valuation analysis involves determining its worth based on its financial performance and market conditions.

What is Valuation Analysis?

Valuation analysis assesses a company’s intrinsic value by evaluating its financial performance, market position, and growth potential. This process helps you understand whether a company is undervalued or overvalued in the market.

Key Models in Valuation Analysis

1. Price-to-Earnings (P/E) Ratio
   • ​
   • Purpose: This ratio helps you gauge if a company’s stock is over or underpriced based on its earnings.
2. Discounted Cash Flow (DCF) Analysis
   • Formula

 ​

Where:

• CF- Cash flow in period t
• r- Discount rate (often the weighted average cost of capital or WACC)
• n- Number of periods in the forecast
• Purpose: This model estimates a company’s value based on its projected cash flows, adjusted for the time value of money.

11) Scenario and Sensitivity Analysis

Scenario and sensitivity analyses offer valuable insights into potential outcomes based on different scenarios and variables. For CFOs, these analyses are essential tools for anticipating risks and planning effectively.

Scenario Analysis

Scenario analysis involves examining potential future scenarios and their impacts on your company’s financial health. This approach helps you prepare for possible changes in the market or business environment by considering multiple “what if” situations.

• Purpose: To assess how different scenarios, such as market conditions or regulatory environment changes, might affect your company’s performance.
• Steps:
  • Identify key variables that impact your financial outcomes.
  • Develop different scenarios based on possible changes to these variables.
  • Analyze the financial impact of each scenario on your business.

Example: If you’re considering a new product launch, you might analyze scenarios such as high, medium, and low market demand to understand how each could impact your revenue and expenses.

Sensitivity Analysis

Sensitivity analysis evaluates how changes in specific variables affect your company’s financial results. This analysis helps identify which factors have the most significant impact on your business and how sensitive your outcomes are to these changes.

• Purpose: To measure the impact of variable changes on financial outcomes, providing insight into which factors most influence your financial performance.
• Steps:
  • Select key variables (e.g., sales volume, cost of goods sold).
  • Assess how variations in these variables affect your financial metrics.
  • Calculate the impact of these changes on key performance indicators (KPIs).

Example: To understand how fluctuations in sales volume affect profitability, you can adjust the sales figures in your financial model to see how your profit margins are affected.

Pro Tip: By integrating scenario and sensitivity analyses into your company’s financial analysis, you gain a clearer picture of potential risks and opportunities. This approach allows you to prepare for uncertainties and confidently make strategic decisions.

12) Variance Analysis

This process involves comparing actual financial results with budgeted or forecasted figures to identify discrepancies. By pinpointing these differences, you gain valuable insights into where things might go wrong, allowing you to take swift corrective action.

What is Variance Analysis?

Variance analysis measures the difference between what was expected and what actually occurred in your financial results. This analysis helps you understand why certain variances exist, which can be due to various factors such as changes in market conditions, cost overruns, or unforeseen expenses.

Key Components of Variance Analysis:

• Budgeted vs. Actual Performance: Compare the budgeted figures with the actual financial outcomes.
• Types of Variances: Identify different types of variances, such as revenue variances, expense variances, and profit variances.

Common Types of Variances:

• Revenue Variance: Differences between actual and expected sales revenue.

• Expense Variance: Variations in costs compared to budgeted expenses.

• Profit Variance: Discrepancies between forecasted and actual profit margins.

13) Trend Analysis

It involves examining financial statements over time to identify patterns and trends that can provide valuable insights into your company’s performance. By understanding these trends, you can make more informed decisions and better anticipate future outcomes.

Key Aspects of Trend Analysis

1. Identifying Patterns Over Time
   • Purpose: Trend analysis helps you spot recurring patterns in financial data, such as increasing revenue or rising costs.
   • How: Compare financial metrics like revenue, expenses, and profit margins over multiple periods.
   • Example: If your revenue has been growing by 5% annually for the past three years, this trend can help forecast future revenue.
2. Assessing Financial Health
   • Purpose: Evaluate the overall financial health of your company by tracking key metrics.
   • How: Look at long-term trends in profitability, liquidity, and leverage ratios.
   • Example: A steady increase in your gross profit margin over time indicates improving efficiency and cost management.
3. Predicting Future Performance
   • Purpose: Use historical data to predict future performance and plan accordingly.
   • How: Analyze trends to forecast future revenues, costs, and profitability.
   • Example: If historical data shows a seasonal spike in sales during certain months, you can plan for increased inventory and marketing efforts during those periods.
4. Detecting Anomalies
   • Purpose: Identify unusual changes or anomalies in your financial data.
   • How: Compare recent data with historical trends to spot discrepancies.
   • Example: A sudden drop in revenue that deviates from your usual trend could indicate potential issues that need investigation.

Purpose: Trend analysis helps assess financial health and predict future performance by examining historical data for patterns. This approach reveals past trends and forecasts future outcomes, enabling strategic planning and informed decision-making. It’s key to understanding your company’s current position and future trajectory.

Are you overwhelmed by the sheer number of financial analyses and struggling to track them all? With reliable financial software, you can simplify your workload and effortlessly make informed decisions. 

How to Perform Financial Analysis with Bunker?

Managing financial data often involves sifting through multiple spreadsheets and outdated systems, which makes it challenging to get accurate insights and make timely decisions. With Bunker, you get a comprehensive view of your financial landscape through intuitive dashboards and real-time reports, cutting down on manual processes and enhancing data accuracy. Some of its features are:

1. Comprehensive Expense Tracking: Bunker automatically tracks and categorizes all business expenses, making it easier to identify and manage both fixed and variable costs.
2. Detailed Financial Visibility: The platform provides deep insights into major and specific types of expenses, such as legal, administrative, and event expenses, helping businesses understand where their money is going.
3. Expense Optimization: Bunker’s insights enable startups to identify areas of excessive spending and implement strategies to reduce unnecessary costs, optimizing overall financial performance.
4. Cost Mix Shifts Analysis:

Imagine your company operates across Singapore, Indonesia, and Hong Kong. Each region has its own unique cost dynamics, so understanding how labor, materials, and overheads shift between these locations becomes crucial for effective financial management. This is where Bunker comes in. By providing a detailed cost mix shift analysis, Bunker breaks down expenses into specific categories across all your regions, ensuring everything aligns seamlessly with your Chart of Accounts. 

Impact: This insight enables decision-makers to strategize cost reallocation or negotiate better deals (for materials in Indonesia)

5. Variance Analysis:

Consider a situation where your company budgets $50,000 for marketing expenses but ends up spending $70,000. Identifying such deviations in financial data is crucial to maintaining control over your finances. Bunker addresses this issue by conducting variance analysis and comparing actual performance against both historical data and your set budgets. With Bunker’s detailed insights, you can drill down to the transaction level, pinpointing exactly where and why the overspend occurred.

Impact: This analysis helps investigate reasons for overspending, identify inefficiencies, and adjust future budgets accordingly.

Conclusion:

Instead of juggling and remembering the intricacies of various types of financial analysis, relying on Bunker offers a more effective solution. Bunker takes the burden off your shoulders, allowing you to focus on steering your company toward sustained growth and success.

Ready to take control of your financial health? Try Bunker today and see how you can reduce costs, extend your runway, and gain deeper insights into your spending. Start your free trial now—no credit card required—and empower your business to thrive.