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.
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.
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.
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.
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.