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Every small business owner knows that cash is the lifeblood of operations, and a good financial analyst is helpful to take care of that cash and maintain a healthy flow.
A financial analyst has broad responsibilities to monitor the financial health of a business for such areas as profitability, liquidity, leverage and investments.
What are the Duties of a Financial Analyst?
A financial analyst has the following responsibilities:
- Prepare regular financial statements, such as a profit and loss statement, balance sheet and statement of cash flow.
- Construct overall budgets for the company and separate departmental budgets.
- Prepare financial plans to ensure adequate funds are always available for operations and expansion.
- Review financial reports to identify inefficiencies and make recommendations for changes.
- Analyze investment opportunities for profit viability and maximization of return on capital.
- Provide financial data input to management for decision-making.
- Monitor and control operations to minimize risks from embezzlement, fraud and theft.
How Does a Financial Analyst Meet These Responsibilities?
After management has defined the long-term plan for the company, it is the financial analyst's job to set the goals and benchmarks to measure progress along the way to accomplishing the plan. The analyst determines which areas to monitor and decides which metrics to use. Management will also set performance goals for the financial analyst to track.
How Does the Analyst Set Goals?
After identifying the areas that will be subject to financial oversight, goals can be set using management guidelines and industry data. Managers can outline several quantifiable objectives that they would like to achieve, such as a sales target or a higher return on capital.
Achieving profits: Profits can be subdivided into several categories: net profits, gross profits and earnings before interest and taxes. For mature businesses, industry averages for net and gross profit margins are a good place to start to set target benchmarks as goals for profitability.
Maintaining liquidity: Liquidity is measured by the current ratio, quick ratio and the amount of working capital. Generally, a current ratio of $2 in current assets for each $1 in current liabilities is a comfortable number. Depending on the aggressiveness of management's long-term growth plan, the analyst should be able to calculate the amount of working capital that will be needed to support expanded sales.
Balancing leverage: Achieving a reasonable return on capital requires a balance between the amount of debt on the company's books versus its capital base. Since debt costs less than equity, more debt leads to higher returns on equity. This will make shareholders happy, but it also increases the financial risk to the business. The financial analyst can advise management on the optimal balance.
Evaluating investments: Deciding whether or not to make an investment involves making estimates of costs and future cash flows, all with a degree of uncertainty. The financial analyst aids in this process by making projections and using such techniques as discounted cash flows to assess a project's viability and make comparisons to other potential investments. Management sets the minimum rate of return required, and it's the analyst's job to determine if the proposal meets the requirements.
Preparing reports: A financial analyst has the responsibility to keep management informed by presenting up-to-date reports with relevant data and ratios that accurately portray the condition of the company. These reports might include aging of accounts receivable, the status of working capital, inventory turnover ratios and amount of current backlog for orders.
Financial analysts have the responsibility to make sure that the company is in good financial health and always has the funds needed to support operations. Setting goals to measure performance in critical areas and reporting this information to management is an important contribution from financial analysts.