Financial management analysis is the process of using equations to analyze and manage the financial health of a company or organization. The analysis of key financial metrics allows the management team to quantify the factors that play an important role in the day-to-day operations of the business. Companies that conduct financial management analysis within their business often pay attention to a variety of departmental budgets and budget deviations, cash flow and profit analysis, and balance sheet analysis. The process of financial management analysis can vary depending upon the metrics that are most important to a company.
The first fundamental component that is critical to financial management analysis is the calculation and tracking of several financial ratios. These are simply mathematical equations that compare two or more financial metrics. Financial ratios can track the liquidity of a company by taking its current assets and dividing them by the current liability. Profitability can be measured by taking the net profit margin and dividing it by the net sales. Liquidity and profitability are just two areas that can be measured; there is a multitude of ratios that companies can use to analyze their business operations.
Companies will often use financial management analysis to determine the amount of revenue that needs to be generated in order to account for the costs associated with business operations. This metric is commonly referred to as a "break even analysis," as companies analyze revenue statements in order to determine the amount needed in order to pay for fixed and variable expenses. Fixed expenses are the expenses that a company must pay regardless of the revenue that is generated, such as rent, insurance, and payroll, just to name a few. Variable expenses depend upon the revenues that are being generated, such as marketing expenses, technology costs, and any expense that is not critical to the operations of a company.
Overall, financial management analysis is a critical component in ensuring that a company is operating profitably and progressing towards the goals and objectives set by the executive team. Although these financial management techniques are universal and are practiced within organizations throughout the world, they are also customizable to meet the specific needs of every business. It is often suggested that every business should implement some level of financial management analysis into its business operations in order to maximize every opportunity to ensure future success.