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Analysing your financial statements? Keep these three limitations in mind

by , 19 August 2014
You should analyse your financial statements regularly.

This will allow you to see trends in your business and see problems that exist or may soon exist. Analysing your financial statements will also help you to allocate resources and evaluate potential projects for maximum return on investment.

That said, there are three limitations you need to keep in mind when it comes to financial statement analysis. Read on to find out what these limitations are so you can overcome them where you can.


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Bear in mind these three limitations when it comes to financial statement analysis
 

#1: Financial information is always historic. Sometimes history is a poor predictor of the future. It's important to bear in mind that trends, ratios, etc. may change over time.

#2: Because you may need to estimate amounts, financial information may be inaccurate. It's almost impossible to have 100% accurate information in your financial statements – it may be useful to double check information from different sources.

#3: Trends will only become apparent over time. In some cases it's tempting to see a trend in your analysis that could really be a random occurrence. Try to allow sufficient time before calling something a trend, says the Practical Accountancy Loose Leaf Service.

Now that you know limitations you must bear in mind, let's take a look at the financial analysis tools you can use:

The financial analysis tools you'll need fall into three categories:
 

  1. Profitability analysis
  2. Return on investment analysis; and
  3. Risk analysis.


Check out this article. It explains in great detail how to use these financial analysis tools.

There you have it: Keep these limitations in mind when it comes to financial statement analysis and try to overcome them where you can.
 



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