People may believe that financial analysis can be improved strictly from education and employment, but that is not always the case. Often, life can provide unique situations that allow finance professionals to improve their analysis.
MY UNIQUE SITUATION
My unique situation occurred as an undergraduate at Temple University. A common interest I had with my dorm mates was baseball. We played Strat-O-Matic, a precursor to fantasy baseball that involved drafting players instead of selecting teams. The draft that occurred in my senior year was the unique situation that improved my financial analysis.
The unique situation organized my work into the following process:
- Establish a simple goal.
- Define the goal.
- Determine measurements.
- Identify elements that fit the measurements.
- Take action.
- Don’t take measurements at face value.
By following this process, you too can determine how your unique situation can improve your financial analysis.
- Does your unique situation provide opportunities for asking questions? Financial analysis must have a starting point, and asking questions is a great way to begin. Asking questions establishes the foundation for learning what financial analysis is, the process of learning whether businesses are accumulating wealth. If your unique situation provides opportunities for asking questions, you are on the path to improving your financial analysis.
- Does your unique situation provide opportunities for defining goals? The goal I established prior to my fantasy draft was to create a winning team. How I defined this goal was run production; I wanted position players who could maximize run production and pitchers who could minimize it. My definition of my goal for the draft has carried forward into financial analysis by understanding terms like profitability, liquidity and solvency. If your unique situation provides opportunities for defining goals, you’re on your way to improving your financial analysis.
- Does your unique situation provide opportunities for determining measurements? Preparing for the draft gave me an excellent opportunity for determining measurements, which allowed me to identify what to look for in regard to run production.
- Does your unique situation provide opportunities to identify elements that fit the measurements? Again, while preparing for the draft, I looked for position players who could maximize run production and pitchers who could minimize it. This task has helped me as a financial analyst because position players and pitchers are like elements on financial statements and in transactions.
- Does your unique situations provide opportunities for taking action? Taking action during the draft was very simple. Taking action in financial analysis goes beyond calculations; it requires communication with people who affect measurements. These are generally individuals working in production, selling and administrative functions. Communicating with these people can help you establish yourself as a helpful financial analyst.
- Does your unique situation provide opportunities for not taking measurements at face value? I remember selecting two pitchers, Alejandro Pena and Bob Welch. Pena had better statistics than Welch when it came to minimizing run production. However, Welch had a better win-loss record, because he would win games with scores like 8 to 4, while Pena would lose games like 3 to 2. This experience helped me scrutinize ratios, like the current ratio. The current ratio can communicate a strong liquidity position, however, a business having large receivables and inventory balances is not as liquid as a business having a large cash balance. So if your unique situation provides opportunities for not taking measurements at face value and you have a critical eye, you can determine whether a business is in fact communicating wealth.
A UNIQUE OPPORTUNITY
I will not deny that education and employment have helped me improve my financial analysis. But I also know that my unique situation helped me do the same. Having this opportunity before becoming a professional is something I will never discount, that’s something you should remember. Don’t discount the unique situations in your life, because sometimes they can help you become a better analyst.
Karl Kern is an accountant, lecturer and writer focused on economics and finance.
For more insights on how you can become a better financial analyst, don't miss FinNext 2020 in New Orleans. Register here.