In addition, the finance function reports on these internal control systems through the preparation of financial statements, such as income statements, balance sheets, and cash flow statements. … In this way, financial analysis is only one part of the overall function of finance, but it is a very important one.

Individual investors or firms that are interested in investing in small businesses use financial analysis techniques in evaluating target companies’ financial information. By examining past and current financial statements — balance sheets, income statements and cash flow statements — potential investors can form opinions about investment value and expectations of future performance. Financial analysis can also assist small-business owners as they weigh the effect of certain decisions, such as borrowing, on their own companies.

If a firm is interested in investing in a small business, its financial analysts will likely examine the company’s past and current financial statements. The objective would be to discover possible weaknesses and any problem areas that should be discussed with company owners. The analysts would look for unusual movements in items from year to year and for patterns in revenue and profits. Steady growth is normally positive, and severe ups and downs might be a sign of discord. Cash flow statements should indicate how the business normally obtains and uses cash. The management team of a small business might conduct a similar analysis as a part of an annual review of the business. The company’s financial adviser or accountant might participate in such reviews.