The Funnel Principle of Financial Analysis
The Funnel Principle of Financial Analysis
Financial Analysis is an exercise which is fraught with pitfalls if we do not adopt a right approach to it. Every business manager has to review and analyze financial statements and reports on a daily basis and to take decisions in the operation or shop floor based on such analysis.
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Big Picture Overview versus Details in Financial Analysis
Often the dilemma is whether to take a big picture overview of financial statements and reports or to go into details. It is a fact that effective financial analysis is achieved by a balance between the two. When we talk about informed decision making, what we mean is that decision making is supported by sufficient information and data which have a bearing on the results of that decision. Too often, we see business managers taking decisions which are not backed up by enough homework being done on factors having a bearing on that decision. This turns into an unpleasant surprise when we do not get the results we want.
It is not to say that big picture overview is bad however, it is important to realize that such an overview is merely a starting point to financial analysis. No kind of analysis can be completed without either a big picture overview or a detail oriented scrutiny and financial analysis is no exception.
Decisions based on symptoms instead of causes
The single biggest blunder and a very damaging one at that is taking decisions based on mere symptoms instead of causes. In financial analysis, symptoms take the form of variances, budget or forecast comparisons, percentages, ratios etc. These tools are merely indicative of a condition which is what a symptom can be described as. However, taking decisions merely on these variances etc which are symptoms without understanding causes underlying the behavior can be nothing short of catastrophic. This is why cause-effect relationships are paramount in any form of analysis and financial analysis is no exception.
For an in-depth look at how to approach financial analysis, watch the below video. It will be an eye-opener.
The Funnel Principle of Financial Analysis on You Tube
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The Funnel Principle of Financial Analysis is a unique perspective which will make your decisions sound and results oriented with no unpleasant surprises.
