Financial decision analysis assesses a business’s financial status and can be internal or external. Horizontal analysis evaluates past financial transactions, while vertical analysis studies financial trends over a selected period. External parties use financial decision analysis to make investment or lending decisions.
Financial decision analysis is primarily used to assess the financial status of a business. Financial decision analysis can be internal or external. It is internal if the analysis originates from the company itself for its own purposes. The analysis is external if it is for the use of other entities external to the company. A financial decision analysis can also be classified into vertical and horizontal analysis.
A horizontal financial decision analysis is an internally generated process that involves the evaluation of past financial transactions over a period of time. These include factors such as balance sheets, profit and loss statements, income statements, cash flow analysis, and cash flow projections. Figures from the cash flow and income statements can be analyzed to give an accurate projection of the amount of sales a company needs to make before it can earn enough money to settle its financial obligations towards its fixed and variable assets.
The analysis helps a business project how many sales it will take to pay off its debt, pay off its invoices, and make enough money to cover expenses for items like shipping and other services. A consistent result over several study periods helps the company to understand the financial trend of the organization. In the same sense, a vertical analysis is also a study of the financial trend in the company. The difference between horizontal financial decision analysis and vertical analysis is in the time period. The vertical analysis is only based on the result of the financial statements of a selected period.
A financial decision analysis can be performed by people who are not related to a company. Such persons may include potential investors, potential lenders, shareholders, suppliers, and government agencies such as tax authorities. The purpose of such analysis depends on the interest of the external party. A potential investor may simply want to discover the financial trends in the company in order to find out if it is a good investment. A lender may want to know the company’s financial history before deciding to lend money. Most external parties have to rely heavily on factors such as published financial statements and other statements the company may disclose. On the other hand, internal analysis is performed by the company itself with the benefit of all the records and other materials necessary to perform an accurate financial decision analysis.
Smart Asset.
Protect your devices with Threat Protection by NordVPN
