8 Things You Must Cover in a Financial Analysis

By Megan Sullivan

6 min read

As a small business owner, the number of records you must keep can be immense. From contracts and leases to marketing plans and payroll to profit and loss statements and balance sheets, it’s a never-ending stream of necessary paperwork that must be generated and organized.

All of these combine to explain the viability of your organization in black and white. Whether used to justify costs, make a case for expenses or demonstrate to lenders why you’re a safe investment bet, all of these statements help make the case that your organization is a viable and smart choice in today’s business world.

For investors, lenders and shareholders, the financial analysis is probably the most important thing to see in order to gauge the organization’s health.

So, what exactly is a financial analysis report and how do you generate one? Below are seven key parts to the analysis and what goes into each.

1. Company Overview or Executive Summary

Similar to writing a business plan, a financial analysis is a way for investors (or those new to your company) to understand who you are and what you do. This overview should include aspects of the business, as well as a snapshot of the industry, the company’s motivations and an understanding of how the company stacks up to its competitors.

This overview should also include a list of the report’s objectives and a glossary of financial terms so anyone who reads the report can easily understand it.

2. Investment Thesis

Dust off your old English papers from college, it’s time to write another thesis statement. In a financial analysis, the investment thesis covers the positive and negatives of the company as an investment property.

This section can also include a fundamental analysis, which is a more in-depth view of the company’s overall viability as an investment. Fundamental analyses typically include company-specific factors (e.g. management capability, financial stability) as well as industry-specific factors (e.g. overall economic conditions, industry outlook).

3. Resources and Data Collection Methods

This section should list any and all resources used to generate the findings in the report. Similar to a term paper, all your sources should be mentioned, including your own documents (e.g. balance sheets, operating costs, inventory ratios, etc.). Any external sources, such as industry trade journals or articles, should also be cited.

How you collected the data in the report is also important. Not only do you need to record your data’s source, but you should also note the source’s methodology for collecting the data in the first place. This is a time-consuming but necessary task that helps anyone reading the document to fully understand all of the assumptions upon which the data is based.

4. Significant Financial Events

Review your ledger for the past time frame you’re using to extrapolate future data, and make note of any significant events that might have had a major impact to your finances over this time period. These can be positive or negative events, but they should be noted so that discrepancies are explained up front and, hopefully, provide very little impact to the report in general.

5. Valuation

This is really the crux of the financial statement. As such, the company’s valuation should be the most robust and thoroughly researched. At its core, a company’s valuation is defined as an independently-determined value for the company’s stock coupled with a comparison of this value to the current market price. Valuation can be arrived at using one of three methods:

  • Discounted Cash Flow Analysis: This method requires the use of future free cash flow projections and discounting them using a weighted average cost of capital to arrive at the present value. That value is then used to evaluate if it’s a good investment. If the DCF analysis is higher than the current cost, the investment is considered a good one.
  • Relative Value: This method takes into account the financial statements of the company’s competitors to see if the current investment cost is in line with its peers. Enterprise ratio and price-to-earnings ratio are two equations often used when determining relative value.
  • Book Value Analysis: Book value is defined as the initial outlay for an investment. By comparing the book value to the market value, it can be determined if the company’s stock is over- or under-priced.

6. Key Risks

Any and all factors that could be classified as a risk should be included in this section. Risk factors are defined as anything that could negatively impact the company’s valuation in the short- or long-term. A pharmaceutical company losing a drug patent or a technology company launching their sole product are examples of factors that can negatively impact a company’s value as an investment.

Outside factors can be considered as well, including industry trends, corporate governance or the industry’s regulatory climate.

Ignoring legitimate risks or pretending they don’t exist will not help you or your organization in the long run. Investors are looking for a good investment with a projected ROI that makes the initial outlay of money a smart move. If you hope to “fool” investors by simply pretending there are no inherent risks, you and your organization can come off as, at best, naïve to the current situation or, at worst, unethical and non-transparent.

7. Detailed Results

As you might have guessed, this section includes very specific information regarding investment returns, balance sheets and productivity ratios. It can also include different interpretations of these results through the use of pie charts, graphs or other illustrations that can make the data easy to understand.

From a investor and/or creditor standpoint, the most important ratios to include are those that measure the solvency of your organization. Liquidity, leverage and profitability ratios are the most important to investors. These ratios can be compared to industry ratios to further examine the company’s performance.

8. Recap and Wrap-Up

Everything presented in the financial analysis should be easily and accurately summarized, giving the investor a recap of the key points. Primarily, you want to highlight the key growth factors you’ve already stated (i.e. the reason your company is a smart investment) while honestly stating any risk factors that could prove to be a hindrance.

Take your time when conducting your financial analysis and don’t be afraid to ask for help. One of the primary functions of a financial analyst is to review companies, take a look at past and current performance and generate an accurate description of the company’s financial situation. A key factor in this process is also highlighting how elements positively and negatively impact a company’s investment viability.

When looking for investors or simply taking the financial temperature of your organization, you’ll be grateful for all of those financial records you kept straight, as they will make this analysis process much easier.

A good financial analysis will give you important insight into the health of your business. Once you have that insight, however, you might still be wondering if that investment is still worth it. If you’re wondering how to gauge your opportunity, here are four questions to ask yourself before investing more capital into your business.

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Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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