Introduction
Decision making is an everyday organizational activity. This is especially so in the finance and accounting field. This field forms the backbone of every organization whereby finance is tied to the process of planning and distributing assets. On the other hand, accounting involves recording and reporting financial transactions. It is important to know that numerical analysis and manipulation of financial data collected from different financial statements using computational techniques is significantly important for both accounting and finance which presents the need for quantitative research tools to aid in decision making. Therefore, this paper will look into how a financial model, financial analysis and financial statements can be used to gather data to inform decision making.
Financial model
A financial model is described as an abstract representation of a real-world financial state of affairs. Therefore, it is a mathematical model that serves the purpose of outlining the performance of a financial asset in a business (Bragg, 2018) . Thus, this is a key quantitative method in the field of finance. In regards to decision making, the financial model is extremely important in making financial projections involving assets or portfolio in a business (Bragg, 2018) . In line with making financial projections, the financial model serves the purpose of offering business personnel with basic assumptions such as sales or revenue growth. By looking into how key variables impact a business, the financial model is used to forecast the impact of future scenarios on the financial performance and position of the business.
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Taking an example of Apple, WallStreetPrep outlines how the financial model is important in forecasting. For example, revenue can be forecasted by either using an aggregate growth rate or the expected price/volume buildup (WallStreetPrep, n.d.) . This can also be used to forecast interest expense which is determined by a company’s debt balance and interest income which is informed by the cash balances (WallStreetPrep, n.d.) . In regards to gathering data, the financial model in this instance is significantly reliant on data presented in the income statement which covers data from different financial periods to aid in forecasting.
In regards to the collection of data, the financial model makes use of summary level revenues and expenses, electronic spreadsheets for which formulas that change the results of the model once certain variables are applied to determine how certain variables and projects will be affected (Bragg, 2018) . This is especially effective in capital budgeting, risk analysis, and overall budgeting. In line with budgeting, the financial model is used to come up with diverse scenarios for the budgeting process to determine the scenarios to be pursued once a detailed budget is arrived at (Bragg, 2018) . In regards to capital budgeting, the financial model is used to determine the different outcomes and how they can affect cash flow or returns associated with a given fixed asset. Finally, a financial model is important in risk analysis since through it, it is possible to determine the variables with the higher negative impact on an organization.
Financial statement analysis
A financial analysis is used to determine the potential risk or returns that a business stands to experience or gain from a given activity. Here, a financial analyst focuses on how a business performs in comparison to previous years. Additionally, they can also focus on the business environment to determine the trends to forecast the future performance of an organization. As outlined by the title above “financial statement analysis” gathering data is done through financial statements, specifically past financial statements. Concerning the quantitative tools that support financial statement analysis, financial analysts have ratios and techniques such as, profitability ratios, return on equity, liquidity ratios, credit analysis among others which serve the purpose of meeting their analysis goals.
The utility of quantitative research in financial statement analysis is accurately presented by the Bloomberg Tax Portfolio which is a financial statement analysis quantitative technique aimed at analyzing liquidity, profitability and asset utilization. This portfolio hand financial analysts the capacity to use diverse quantitative techniques to enhance the utility of information in different financial statements. This is through trend, ratio and common-size analyses (Glazer & Stevens, n.d.) . Ratio analysis is used to determine different relationships in the financial statement items and related information, trend analysis is used to determine changes in financial statements and related information in an organization over time, and finally, common size analysis is used to compare the financial position or performance with other organizations or industry benchmarks (Glazer & Stevens, n.d.) . In regards to the areas of focus in the portfolio, liquidity and profitability analysis aids in determining how an organization is aligned to generate more revenue and control costs whereas, asset utilization is focused on operating assets and long-term fixed assets.
Reflection
Given the centrality of financial statements in finance and accounting based on the central premise of an organization that is to use its assets to realize profits, quantitative research is going to grow both in scope and complexity to meet the reporting needs of businesses. Additionally, from a general point of view, quantitative research is going to grow because almost all aspects of the world are dependent on the economy and to understand fiscals, quantitative research is needed.
Conclusion
Concerning the purpose of the paper, it is evident that quantitative data plays a key role in accounting and finance. This is because, through the financial model it is possible to determine the performance of assets and through financial statement analysis, it is possible to forecast the fiscal performance of an organization. In both of these tools, financial statements are the central sources of research data, and from the analysis, it is possible for financial analysts to arrive at a decision.
References
Bragg, S. (2018, March 28). Financial model . Retrieved from Accounting Tools: https://www.accountingtools.com/articles/financial-model.html
Glazer, A. S., & Stevens, G. L. (n.d.). Financial Statement Analysis: Quantitative Techniques-Analyzing Liquidity, Profitability, and Asset Utilization (Portfolio 5133) . Retrieved from Bloomberg BNA: https://www.bna.com/financial-statement-asset-utilization-p10798/
WallStreetPrep. (n.d.). Guide to Forecasting the Income Statement . Retrieved from WallStreetPrep: https://www.wallstreetprep.com/knowledge/income-statement-forecasting/
