Analysis and Interpretation of Financial Data: An Important Ingredient for Business Decision Making
Doing business is never without decision making. Sometimes it becomes necessary to take one decision or another to improve results. Such decisions may bother on laying off of staff or retaining them, buying an asset or leasing, outsourcing a service or setting up an in-house unit to provide such service, to mention but a few.
It is crucial to mention that decisions are always taken based on available data or information. This data or information could be financial or non-financial. In this article, I discuss what analysis and interpretation of financial data are, ways of analyzing your data and why they are indispensable in making business decisions.
Analysis and interpretation of financial data
- Analysis of financial data describes the situation where a set of defined formulas or systems are used to simply financial data. One common example is the use of financial ratios such as profitability, liquidity or investment ratios. For instance, using a current asset value of GHS2, 000.00 and current liability value of GHS4, 000.00 to compute a current ratio, which in this case is 0.2:1, is analysis.
- Interpretation of financial data is where you make meaning out of the results of the analysis done. Interpretation therefore depends on analysis. Thus, there cannot be interpretation without analysis. For example, finding out the meaning of the current ratio of 0.2:1 is interpretation.
Different ways of analyzing your financial data
- Horizontal analysis (year-on-year): This describes you comparing a previous year’s results with that of the next, in a continuous manner to identify the changes in the results. For example, finding out the variations in the sales performance of XYZ Ltd for 2012-2018.
- Vertical analysis: Under this, you express the results of all other items as a percentage of a particular item of your profit or loss statement or balance sheet. Revenue or sales is the denominator used for profit or loss statement while total assets is used for balance sheet. Thus, primarily vertical analysis relate to these two financial statements.
A mistake you should not commit
Using financial data without analyzing and interpreting it is akin to exporting food products, like cocoa, in their raw state. The value (earnings) to be derived from such an approach will not be much compared to exporting processed products. A mistake you should not commit as a business is to use financial data without first having to analyze and interpret it.
Several techniques exist for analyzing financial data. However, it takes an expert mind to interpret what the results mean. You can make the most of the financial data your financial systems generate for you by taking the pain to analyze and interpret the data.