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Financial decision analysis is mainly used to assess the financial state of a company. The financial decision analysis may either be internal or external. It is internal if the analysis originates from the company itself for its own purposes. The analysis is external if it is for the use of other entities outside the company. A financial decision analysis may also be further classified into vertical and horizontal analysis.
A horizontal financial decision analysis is an internally generated process that involves the assessment of past financial transactions over a period of time. These include factors like balance sheets, profit and loss statements, income statements, cash flow analysis, and cash flow projections. Figures from the cash flow statements and income statements may be analyzed to give an accurate projection of the amount of sale a company needs to make before it can make enough money to settle its financial obligations toward its fixed and variable assets.
The analysis helps a company project how much sales it will take to pay off its debts, pay its bills, and make enough money to cover the expenses for items like shipping and other services. A consistent result over several periods of study helps the company understand the financial trend of the organization. In the same sense, a vertical analysis is also a study of the financial trend in the company. The difference between the horizontal financial decision analysis and the vertical analysis is in the length of time. The vertical analysis is only based on the result of the financial statements of a selected period.
A financial decision analysis may be done by people who are not related to a company. Such people may include potential investors, potential lenders, shareholders, suppliers and government agencies like tax authorities. The purpose for such an analysis depends on the interest of the outside party. A potential investor may simply wish to find out the financial trends in the company with a view to finding out if it is a good investment. A lender may wish to find out the financial history of the company before deciding to lend money. Most of the external parties have to depend to a large extent on factors like published financial statements and other statements that the company may reveal. On the other hand, the internal analysis is done by the company itself with the benefit of all of the records and other materials necessary to make an accurate financial decision analysis.