Introduction to financial and economic analysis

Introduction to financial and economic analysis

When we talk about financial and economic analysis, also known as financial statement analysis, accounting analysis or balance sheet analysis, we refer to the analysis of the information contained in the documents or financial statements that make up the annual accounts of the company, the objective of which is to obtain a complete view of the economic and financial aspects of a business and to make a diagnosis of the equity situation and the financial health of a company.

Financial vs economic analysis

In principle, we could summarise the differences between economic analysis and financial analysis in that financial analysis focuses on comparing profit and costs for the company. In contrast, the economic analysis seeks to compare profit and costs for the whole economy.

financial analysis vs economic analysis

In other words, the economic analysis attempts to demonstrate the value of “The Project” to society as a whole; it also covers the costs and benefits of goods and services that are NOT sold on the market and therefore does not have a market price.

On the other hand, financial analysis is limited to organisations or their units, which implies a quantitative approach based on funds that compare the costs and revenues of a company to determine its profitability and thus its sustainability. The company’s financial statement, i.e. the cash flow statement, the income statement and the balance sheet, are used to perform this analysis.

The fact that the economic analysis and the financial analysis are different does not mean that they are not complementary, so it is important to know that for a project to be economically adequate, it must be financially sustainable.

The objective of the economic and financial analysis

As mentioned above, the economic and financial analysis uses different techniques to diagnose the company’s situation and its prospects to be able to make appropriate decisions based on them. We can therefore define its objective from two points of view:

  • From the internal point of view: its main objective is to help the company’s internal management make the best decisions and correct the weak points that could risk the company’s future.
  • From the external point of view: The techniques used in the analysis of financial statements are intended to be useful for people interested in knowing the company’s situation and foreseeable evolution.

Complements to the analysis of financial statements

The company’s analysis arises as a consequence of analysing all the data considered relevant to the company to obtain a report on its weaknesses and strengths and is a key tool but not the only one for the effective management of the company. The economic and financial analysis must be complemented with the following data to be reliable for the company or organisation:

  • Company information: it is not only necessary to know the company’s annual accounts data, but it is also important to know the legal data (such as year of foundation, share capital, tax debts or social security contributions, litigation, etc.), general data (such as company culture, objectives, contractual commitments with other companies, etc. ), marketing and commercialisation data (such as product range, market research, seasonality of sales, etc.), human resources data (such as training, staff, working environment, etc.), production data (such as patents, productivity, production process, etc.) and financial data (such as trade reports, percentage of unpaid debts, insurance policies, supplier reports, etc.).
  • Sectoral information: It is important to recognise that the company is strongly influenced by the sector in which it operates, so it is vital to keep up to date with data provided by trade associations, the press, the chamber of commerce, banks, the national statistics institute, the autonomous communities, etc.
  • General information: The company will undoubtedly be affected by everything that has to do with the economy in general, so it is necessary to pay attention to this situation’s data.

As has been made clear, the importance of the economic and financial analysis for any company lies in the fact that it is an instrument that allows it to monitor its economic evolution in the short, medium and long term and that it is an essential part of the integral diagnosis of the company. To carry out this analysis, various data must be taken into account. It must be done regularly as if it were an analysis so that measures can be taken optimally.

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