Accounting For Managers - Ratio Analysis
Types Of Financial Analysis
Financial analysis may be classified on the basis of parties who are undertaking the analysis and on the basis of methodology of analysis. On the basis of the parties who are doing the analysis, financial analysis is classified into external analysis and internal analysis.
External
Analysis:
When the parties external to the business like creditors, investors,
etc. Do the analysis, the analysis is known as external analysis. This analysis
is done by them to know the credit-worthiness of the concern, its financial
viability, its profitability, etc.
Internal
Analysis:
This analysis is done by persons who have control over the books of
accounts and other information of the concern. Normally this analysis is done
by management people to enable them to get relevant information to take vital
business decision.
On the basis of methodology adopted for analysis, financial analysis may
be either horizontal analysis or vertical analysis.
Horizontal Analysis:
When financial statements of a number of years are analysed, then the
analysis is known as horizontal analysis. In this type of analysis, figures of
the current year are compared with the standard or base year. This type of
analysis will give an insight into the concern’s performance over a period of
years. This analysis is otherwise called as dynamic analysis as it extends over
a number of years.
Vertical
Analysis:
This type of analysis establishes a quantitative relationship of the
various items in the financial statements on a particular date. For e.g. The
ratios of various expenditure items in terms of sales for a particular year can
be calculated. The other name for this analysis is `static analysis’ as it
relies upon one year figures only.
