What is a financial analysis?

A financial analysis is best defined as the assessment of financial data to understand a business's financial position and performance. This process involves examining the financial statements, such as the balance sheet, income statement, and cash flow statement, to derive insights into profitability, liquidity, solvency, and overall financial health. By analyzing these financial metrics, stakeholders can make informed decisions regarding resource allocation, investment opportunities, and strategic planning.

While developing marketing strategies, monitoring employee productivity, and evaluating customer demographics are all important aspects of business management, they do not fall under the definition of financial analysis. Those activities pertain more to operational and strategic management rather than directly assessing financial data to gauge the company's fiscal status and performance. Financial analysis serves as a critical foundation for understanding how well a business is performing and identifying areas for improvement or growth based on solid financial evidence.