The Role of Financial Analysis in Strategic Planning for Businesses

The Role of Financial Analysis in Strategic Planning for Businesses

Concept of financial analysis

Financial analysis refers to a method of assessing a business, budgets, projects and different types of negotiation related to finance that helps in determining suitability and performance. In other words, financial analysis helps analyse if an entity is a liquid, stable, and solvent capable enough to warrant a monetary investment (Fuertes et al. 2020). Financial analyses are always conducted internally, and such analysis helps fund managers make decisions in future business and evaluate the previous trends that have resulted in past successes. However, the financial analysis may also be conducted externally as it can aid the investors in selecting the best possible investment opportunities.

The economic trends are evaluated using financial analysis, and with that help, the financial policies are set that help create long-term business activity plans (Gartenberg et al. 2019). An organisation’s financial statements comprising the cash flow statement, balance sheet and income statement, are analysed thoroughly by a financial analyst. In both corporate and investment settings of finance, financial analysis can be conducted

The accounting department and the management analyse corporate finance to make improved business decisions (Palepu et al. 2020). This internal analysis comprises the internal rate return and net present value.

An external analyst to the company does the investment financial analysis family for various purposes of investment. The analysts can adopt either a top-down or a bottom-up approach. The former approach analyses the macroeconomic opportunities, and the latter approach helps conduct the ratio analysis (Hitt et al. 2019).

Financial analysis is mainly of two kinds . These are fundamental analysis and technical analysis.
In the former type of analysis, the ratios are acquired from the data, such as the company’s earnings per share, which helps determine the business value (Gartenberg et al. 2019). On the other hand, the later type of analysis is done using the statistical trend that is acquired using the trading activity. The market condition behind the pricing trends is analysed with the help of technical analysis.

Concept of strategic financial analysis

A strategic financial analysis refers to the review framework where the performance is analysed, goals are assessed, adjustments are made per the forecasts and strategies are made with the help of actual results (Gartenberg, 2019). The strategic financial analysis intends to analyse the framework where the performance can be analysed, goals can be assessed, and adjustments can be made according to the forecasts and the various types of strategy based on the actual results.

When reviewing the business financials, it is necessary to focus on the three key areas. These are cash flow, profit and loss and balance sheet.

What are the steps to conduct a strategic financial analysis?

Five steps shall be followed while conducting the strategic analysis of the financial statements

Reviewing the business financials regularly is regarded as a good start. For instance, using the LivePlan software helps compare work; hence, no spreadsheets will be required.

In a given month, the actual financial performance can vary. In this regard, it is essential to identify the exceeding projections.

Also known as profit and loss, the income statement helps document income and expenses (Gartenberg et al. 2019). Compared to the forecast, it will be seen whether the sales can meet the goals and whether the expenses align with the budget.

The cash flow statement helps tell how the cash moves into the business.

The balance sheets give a complete overview of the financial position. For instance, the number of assets the business possesses and the money owed is assessed with the help of balance sheets.

The function of financial analysis in the strategic planning for the business

In the strategic planning of a business, financial analysis plays a critical role as it offers the essential information which can state the development of a strategic plan. Suggested below are some of the ways that can be contributed by financial analysis to strategic planning of the growth of the business.

Importance of financial analysis in a business

There are various benefits of financial analysis in a business. Companies can make informed decisions related to business planning with the help of financial analysis. The business leaders get informed about where to invest the money that will help them earn substantial profits. Business leaders better understand financial statements and this in-depth understanding helps evaluate past performance and foresee prospects. Moreover, financial analysis helps develop communication between various organisations and their stakeholders (Hitt et al. 2019). By presenting lucid and precise information about the business’s financial health, stakeholders are well-informed about the opportunities and risks associated with the business. In an organisation, greater transparency can be promoted with the help of financial analysis. It also helps to improve the efficiency of the business (Palepu e al. 2020). Finally, it helps analyse the competitors so that an organisation can acquire a competitive advantage, overcome their weaknesses, ad overcome their strengths.



1. What do you mean by financial analysis?

Ans: Financial analysis refers t the method of evaluating a business, finance-related transactions and budgets to determine their suitability and performance. In other words, it analyses whether the entities are profitable enough to warrant a monetary investment.

2. Define corporate financial analysis.

Ans: The analysis in corporate finance is conducted internally by the accounts department, and it is shared with the management so that they can develop their strategies related to decision-making. The internal analysis comprises the NPV, Net Present Value, and IRR or Internal Rate of Return.

3. Mention any two steps of conducting the strategic financial analysis.

Ans: The two steps that are needed in conducting the strategic financial analysis are:

4. State the two kinds of financial analysis.

Ans: The two kinds of financial analysis are `technical analysis and fundamental analysis, in which fundamental analysis use financial statements and ratios to evaluate the value of intrinsic security. On the other hand, a security value is assumed by the technical analysis, which determines the price and mostly focuses on trends.

5. How is financial analysis important in strategic planning for business?

Ans: In the strategic planning of a business, financial analysis determines the growth opportunities, looks for allocation of resources, monitors progress and evaluates risks.

Author Bio:Mark Edmonds, an accomplished professional at Academic Assignments, specializes in delivering top-quality assignment writing services, particularly in the field of strategy and planning. With a passion for empowering students, Mark’s expertise in financial analysis and strategic planning helps students excel in their assignments. Rely on his guidance to master the art of strategy and planning for business success.

Academic Assignment © 2015 | All Rights Reserved

Academic Assignments is a brand under Simplified Education group of companies.