5 Myths about financial analysis and numbers
The reasons why Financial Analysis is something considered outside the realm of an individual with a non-finance background are the myths that surround it. The fact that the phrase “financial analysis” sounds very technical contributes to these myths to complete the aura of mystery.
Finance professionals and those with finance background have not helped the cause any by refusing to demystify financial concepts. Perhaps, in their way of thinking, they hold the power of this knowledge and hence are reluctant to share it.
Financial Analysis can mean different things depending on how broad or narrow an interpretation of the definition we choose to take. From a broader perspective, financial analysis can mean the process of evaluating businesses, projects, budgets etc of a business venture that is currently in operation.
You need a Degree in Finance to understand Financial Analysis!
While by no stretch of imagination is financial analysis a generalized area or body of knowledge, it is equally true that it is not something which requires a full degree in Finance to understand and utilize. The concepts underlying financial analysis are quite simple and while a few of the terms need to be digested, a lot of the work can be achieved through logic and common sense.
You need to be an Accountant to understand Financial Analysis
While it is true that an Accountant by virtue of being the individual tasked with the primary responsibility of producing financial statements tends to understand financial analysis more quickly, it is definitely not true that one has to be an accountant to understand and utilize financial analysis. This ease of understanding for the accountant comes from the umbilical cord connection between accounting (books of account) which are the source for production of financial statements.
However, any Business Manager who is responsible for results can pick up concepts of financial analysis without knowing any technical aspects of accounting and in fact it is true in most industries, that the head of the unit is a non accountant who is responsible for the results and performance of the unit. Again, it is important the accountants make an effort to lift the veil that surrounds the concepts and make them simple to understand for those not from a finance or accounting background. This is a responsibility that many of them unfortunately fail to carry out resulting in a deeper fear in the minds of the non-finance people.
You need to be a wizard in Math to carry out Financial Analysis.
This is another of those classic myths. Since a major part of the financial analysis exercise deals with numbers and figures, people immediately jump to the conclusion that you need to be some kind of wizard in Math to carry out effective financial analysis. This is as far from the truth as the first two myths which dealt with having a finance or accounting background.
While again, numbers and figures do behave in a certain manner and understanding those behaviors makes the analysis that much more impactful, it has nothing to do with math per se. I will even go as far to say that if you can do basic addition, subtraction, multiplication and division and have a working idea of percentages you are good to go.
People with non finance background cannot be good at Financial Analysis
This myth is purely the result of the handiwork of accountants and people with finance background who have resolutely refused to cede what they consider their territory. However, as I said earlier, more business unit heads are those from a non-finance background and thus this in itself blows the myth that they cannot be good at financial analysis since they are responsible for the performance and results of their unit. You have to remember that the accountant merely produces the financial statements from the books of account, he does not hold singular rights or for that matter mastery over their output.
I have regularly come across business unit heads with a non-finance background who have a very healthy head for finance and financial analysis and by virtue of this have actually performed excellently. It is something that can be emulated with a bit of effort and support from the accountants/finance people.
You need to wade through difficult technical terms before understanding Financial Analysis
The last of the five myths and a big one at that is that you need to go through complicated technical terms before understanding financial analysis. While it is true that there are technical terms to be understood and used in analysis, they are by no stretch of imagination insurmountable and definitely not out of bounds for non-finance people.
As an accountant and finance person myself, I can without hesitation say that a good chunk of the understanding will come from logic and common sense and knowing cause effect relationships. In fact, I would go as far as to say that knowing cause effect relationships will de-mystify financial analysis a great deal and I will be actually using this approach to do just that in this blog series
So, fasten your seat belts (as opposed to putting on life jackets which will frighten all and sundry), this ride may be bumpy but I promise it will be exciting and at the end of it you will be as savvy in financial analysis as any of your esteemed accounting or finance colleagues. I promise it will not give rise to sleepless nights or hair pulling or head bashing.