Who Is A Financial Analyst? Job Profile, Skills, And More

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August 7, 2023 Jayant Sharma Financial Modeling, Knowledge

The business provides the real numbers and finance takes the time to study them at length to assist businesses in picking the optimum practices for the best results. Financial data is no different from any other set of data and thus, does not betray any interpretation or opinion of its accord. Financial statements are dissected and the culprit is a financial analyst in the background. The professional in charge is thorough and well-read on business indicators. Let us find out how they manage to format key financial conditions from financial statements…

Before diving into the deep end of the steps to becoming a financial analyst, we should clearly define the key terms related to the main issue at the heart of this article. A financial analyst must be aware of the key principles surrounding his field of work i.e. financial analysis. A financial analyst in today’s competitive labor market fairs well only so long as they are well nurtured and practiced with standard practices of the industry where they plan to spend the waking hours of their adult life.

The scope of this field needs a full-fledged discussion as well. No choice we make in life should be ill-informed or we might regret them. If you are a person who does not know how to become a financial professional/financial analyst but aspires to be, this article should serve you well. For financial professionals, the world is confined to detailed margins and figures on paper, the calculation of these figures, and an honest attempt to improve the business entity or individual firm with whom they are employed.

The scope of the profession of a financial analyst is wide and decent fathoms deep. Exploring the requirements for becoming an analyst is also essential to note as some individuals might find the process tedious or costly.

When you set out to become a professional in a discipline, reading esoteric material about the discipline in question is a good way to inform your decision. Finally, a brief look into various job opportunities an aspiring professional can hope to find. An idea of the job market and the length as well as breadth of the opportunities at hand will strengthen your resolve to learn about the profession and expedite the process of selecting a niche for the same, so you can be onwards on your journey to becoming a spectacular financial analyst and enjoy a life without financial burden. Now, let us initiate the exposition and not slip into idyllic reveries of future success and wealth…

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Financial Analysis: The Core Concept

Analyzing is a process that assumes a critical approach to a subject where the focus lies on excavating the particular reasons that hide in the recesses of the phenomenon. Be it literature, science, or finance, analysis is conducted to review the validity of an endeavor, elicit hidden details, generate a hypothesis to describe the differences in variables, and bring effective solutions to the forefront of business decision-making.

It also offers a basic foundation for the prediction of future outcomes and the actions that cause changes in the likelihood of certain events that can be beneficial to a business in the long term. It differs in its methodology and cares to break down the values found on financial statements released by businesses on a quarterly or annual basis. It uses these figures to generate meaningful indicators and ratios of finance that securely represent good or bad financial health/conditions.

It utilizes the recorded transactions of a business, factors in present valuations, and market conditions with multiple purposes, differing from the desires of business entities. Investors look for sound financial statements and good financial credit with little to no debt-to-asset ratio. For businesses it is critical for ascertaining the returns on capital investment to equity holders, calculate net profits gained by an enterprise, and how well the working capital of the business is managed.

Other Factors That Are Analyzed by a Financial Analyst for a Business Are:

Liquidity position
The solvency position of an enterprise
Earning potential of an enterprise
Affects business valuation due to risk
Debtor day and creditor day calculations
Fixed asset production volume and turnover ratio

A financial analyst plays a game of formulas and data organization while conducting a firm’s financial analysis. Financial analysis is a big process that can lead to better fund allocation in the long term. This is possible as financial analysis is a tool that declares the true cost of running a business.

It considers multiple variables and scenarios and generates the true cost of running the business under certain economic conditions. It also considers business variables and sets the foundation for internal benchmarking of future business records and results.

For example, considering the three major financial instruments/statements it utilizes to analyze a company the income statement, balance sheet, and cash flow statement, it can use the trends over the last decade recorded in the accounting books of a business and take certain as indexes for future comparisons due to the stable extraneous conditions. These indexes can function as means to compare different years of different companies in an industry and whether they are functioning in line with GAAP and other corporate principles.

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Financial Analysis Can Be Classified Under Distinct Categories, and the 6 Most Common Financial Analysis Methods Are as Follows:

Horizontal Analysis: This is a wide variety of analysis that considers data of the company under an important metric over multiple years, sometimes a decade, and then finds out the growth rate of the metric and the changes in its constituting factors.
Vertical Analysis: Also known as a common-size income statement, it is a form of financial statement analysis that converts components of an income statement into percentages by dividing them by sales revenue. Furthermore, it is a method of analysis that can be used by an analyst to compare practices to industry leaders, since it is a method that does not care for the size of revenue, only the percentage of operating profit margins and net profit margin.
Profitability Analysis: It is an analysis method that measures the economic viability of a business and its margins for profitability. It contains metrics like EBITDA, EBIT, and gross profit margins of a business. They can be useful for making strides into grasping the long-term profit potential of a business.
Analysis of Business Liquidity: It is a thorough analysis that details the obligations of repayment and other compulsory payments and the operations of the balance sheet to meet them without garnering further debt or interest, thus falling into a debt trap. The methods included in this analysis are the current ratio or net working capital which can be easily formulated by subtracting the total liabilities of a firm from the total assets of the firm, cash ratio, etc.
Variance Analysis: A different financial analysis from the previous types. This analysis is opted by a financial analyst to determine the difference between the forecasted funds required to meet obligations and achieve annual business goals and the actual funds used up during a year. Its primary objective is to establish whether the budget created was accurate with a small room for accounting error and if not, it proactively plans to figure out the root of the problem that afflicts the business. The variance from the predicted budgeting can be favorable or unfavorable and under both circumstances, analysts must review the mistakes made in assumptions or inputs.
Scenario & Sensitivity Analysis: This type of financial analysis involves the checking of financial models by verifying the risk potential in the results of the model and the predictions made based on current trends. Sensitivity analysis is conducted to determine the extent of changes in some species due to induced variables. The risk change can give businesses an incentive to follow the path if it decreases and vice versa. Furthermore, the analysis of business does involve a bit of financial forecasting. Forecasting the future precisely even when founded on realistic assumptions and clear data is far-fetched, much less when uncertainty patrols the forecasted figures. Therefore, scenario analysis is an effective tool for washing away this uncertainty by imagining certain possible financial situations and outcomes that afflict businesses and how a firm will cope with that. Questions like whether the accumulated debt of the company is strangling growth opportunities and how will it be dealt with in case a recession is around the corner.

While financial analysis methods are far wider in scope than the cursor information I have disclosed, to keep the article brief, let us part ways with the methods of financial analysis and discuss briefly the

various practices that analysts follow when evaluating business financials to determine a logical vein that can act as a foothold to prevent stakeholders from arriving at detrimental decisions. Before we start with the best practices followed by an analyst, we must demystify …

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The Role & Responsibilities Of A Financial Analyst:

A financial analyst can be defined as a professional who does not simply deal with the process of analysis as the name might suggest but also claims the responsibility of sifting through investment options for a company and selecting the most appropriate candidate, keeping in consideration the business temperament of the company and its aim for investing.

Furthermore, they are also relied heavily upon to keep up with current changes affecting markets such as the changes in net profit margin due to hikes in tax and other governmental regulations. An analyst is also tasked with supplying well-researched information about the general macroeconomic condition of the international economy or a particular industry of concern. The approaches of analysts to solve problems may differ but they all possess the skill set to construct financial models and test them as well.

The responsibilities don’t finish with the change in the paragraph as analysts must grapple with absurd financial figures, collect them internally via different department heads, organize the information in a manner that is understandable and analyze it further through complex functions and calculations.

Finally, the outcomes of the analysis can be interpreted in easy-to-grasp terms for stakeholders. Lastly, businesses are different by nature and the responsibilities of an analyst might vary depending on the industry they find themselves in at a particular moment. However, what is certain is that technological improvements reverberate across various industries and stay updated on the significant bunch among them is essential for an analyst to perform his job of comparing different businesses accurately.

They are considered the busy bees of a business who perform the due diligence for managers and hold the steering wheel of a business in the recommendations of their reports. Among analysts variability in their approach is often a sign of experience or thoroughness, maybe even personal style. The apples don’t fall far from the tree and hence, not far at all from each other and hence they all follow some standard practices that can be nurtured in an aspiring financial professional like you.

They are as follows:

Data organization should be top-notch under the supervision of analysts for the financial management of a company. The key to business growth today is to understand the factors underlying the changes in accounting figures. The results of financial models and forecasts as well as their specific inputs & assumptions need to be kept organized. Firstly, this saves time for a business and allows for systematic comparison of standards internally and among the industry. Secondly, calculations for financial models work in spreadsheets of software like Excel and without proper organization, the computed data results in inexplicable results. Lastly, data organization is of immediate importance as retrospective reports or analyses like variance analysis cannot be performed in a vacuum and require well-organized financial statements.
Simplistic calculations and formula usage is preferred under all circumstances as complex streams of calculations can encourage errors in models.
Memory is a fickle thing and can be remembered wrongly. That is one reason why good analysts always utilize notes and comments in different cells to convey ideas to themselves in the future or to other colleagues. For instance, typing out minor suggestions on the kind of highlighting and formatting you appreciate as well as the evaluations regarding the consistency of a firm’s growing creditor days can be useful in conducting the proper analysis.
Redundancy is the enemy of prediction and skew ratios towards an extreme. Before analysis, reviewing the financial data compiled through multiple sessions and receiving feedback from multiple credible financial professionals can be the key to resolving any issues you might be facing alone. Thus, analysts believe that they are strong when they stand united and aid each other whenever they can by performing quick reviews.
Lastly, we want to answer a frequently asked query. Our answer to whether good communication skills are essential to a financial analyst will always be ‘YES’ in capital letters. Without proper conveyance of the results of financial analysis and modeling, stakeholders often make the wrong decisions. Therefore, good communication skills and presentation skills are necessary for an analyst. Findings can be portrayed through visualization software like MatPlotLib or Power BI.

Now that we have outlined the various roles and responsibilities of an analyst, let us jump to the final stop in our journey and learn about…

How To Become A Financial Analyst:

First and foremost the path of becoming an analyst is only possible when you have detailed knowledge of the aforementioned topics. To gain this knowledge that is so elusive to many among us who deem finance to be an extremely hard code to crack, there is a certain way in which you should approach this field. In the education department, you must follow through with finance, statistics, or economics in your bachelor’s with a background in commerce during your high school years. After the completion of your graduation, you can travel down two different paths.

You can enter the job market with an entry-level job if you can score a good internship during your graduation. Then you can make up to 40 thousand INR and follow a specialization through a master’s degree later down the line. You can also opt for a direct route to the master’s specialization if you do not want any interruption in your studies and wish to directly gain a higher-tier job.

In most cases, internships play the biggest role in this field to gain an entry-level job. They render experience and exposure to fresh recruits and tie them to understand the metrics that rule the industry. Teaching the practical side of finance can be difficult for most people and learning to make peace with the fact that the knowledge you learn in theoretical classes finds little application if you are only in graduation.

Understanding the importance of learning standard procedures of market valuation, gauging financial conditions, and learning from the best can be beneficial in ways you cannot imagine. In the unlikely case of you being a person who has not cleared an MBA or possesses a major in the field of economics, you’ll have to manage to clear the series 7 or series 63 examinations at the international level.

Gaining such credible certifications goes a long way in making the job opportunity you have been seeking as an analyst for a big brand.

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Frankly, those who pursue courses in data science, technology, and engineering possess an edge over other candidates as the work demands of analysis are overlapped by data science methods. Familiarity with them can ease the load of work for entry-level professionals who might feel overwhelmed by the workload otherwise. With a 33 thousand INR monthly package for beginners into the field, it is a great branch of finance to pursue if you believe you are cut out for the data work and other business hassles involved.

Now that we have clearly outlined the requirements for becoming an analyst for the financial management of a company, let us also define the ideal analyst archetype by filling out the skill set that has been talked about in brief.

The Skills for A Financial Analyst:

The top skills that a prime candidate for the role of analyst of finances must have been as follows:

Accounting skills are a necessity for most analysts as they cannot understand the principles of finance and the jargon that clouds business financial statements without a good grasp of accounting. It is not a platitude to call accounting the language of business transactions and functioning as all aspects of business goals are related to accounting in one or the other. Accounting aids in cost reduction, statement creation, budgeting practices, ledger work, etc.
Financial skills revolve around general literacy about the condition of markets and the future of economic policy and its impact on business should be starkly evident in the knowledge bank of an analyst.
Analytical skills are a given for an analyst of any sort. The ability to evaluate and critically thinking are key but forecasting ability and prediction are uniquely critical to financial analysis.
Communication and presentation skills should be top-notch as mentioned previously. To enable the complete potential of these skills the technical knowledge should be comprehensive as well.

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FAQs:

Q1. What is the scope of a career as an analyst for financial management?

The scope for this field of work is optimistic though the market has developed in an unkind fashion for those who prefer their financial work to be handed after slowly performing their due diligence and other duties. It has turned out to be an extremely competitive market wherein the remuneration is not stellar but the working hours are enervating. The overall market has grown in tandem with the GDP growth rate of the country which does not benefit the employment situation in India.

Q2. What are the different kinds of analyst positions in this field?

The finance field holds three distinct kinds of positions open for those professionals who sell the status of an analyst:

Buy-Side
Sell-Side
Investment Banking

Q3. What is a business cycle?

The process of the crest and troughs in business transactions and activity suggesting a period of boom followed by a recession is known as a business cycle.

Conclusion:

We hope you learned something about financial analysts through this article. Thank you for going through the article