Financial Analysis – 5 Major Myths Exploded

Financial Analysis is rocket science claim the accountants.

Are you ready to explode some myths about financial analysis?

In this blog post, we will explode 5 Major Myths about Financial Analysis as below:

• You need a Degree in Finance to understand Numbers!
• You need to be an Accountant to understand Numbers.
• You need to be a wizard in Math to carry out Analysis with Numbers
• People with non finance background cannot be good at Numbers.
• You need to master difficult technical terms (jargon) before understanding financial analysis 

So, strap on your seat belts.

It is going to be such a delight to explode these myths despite being an accountant myself!

A Story You will Never Forget!

I will begin with a story.

In the year 1987, I was working for a renowned chain of hotels called the Taj Group in India who owned gorgeous hotels and resorts in their portfolio.

One of their resorts in Goa, India is a breathtaking resort perched on a hillside inside a 200 year old Portugese fort and overlooking miles of golden, sandy beaches.

I was the Financial Controller of the Taj Aguada Beach Resort Goa, India.

I worked with a General Manager of this resort who came from a food and beverage background.

What struck me about him was his intuitive understanding of financial analysis. 

He was extremely comfortable in the world of numbers and was able to read and interpret financial statements quite well.

When I first started working with him, as a finance professional myself, I was impressed with his numbers sense.

As is always the case, I too assumed that he must have had some kind of finance or accounting background to be able to have that degree of comfort with numbers.

As we worked together, became great friends and I discovered more things about him I was shocked to find that he had absolutely no background at all in finance.

Embracing Financial Analysis

Digging a bit deeper I learned the secret of his proficiency with numbers.

He genuinely liked and was committed to analyzing numbers, interpreting them and taking decisions based on that.

It taught me a great lesson.

Your background does not matter. 

What matters is, if you take a genuine interest in learning and mastering something, anything, you will end up achieving your goal.

You may be encouraged to learn that my interest in numbers and financial analysis and concepts was kindled by an ex colleague in that same resort where I worked.

He was the Food and Beverage manager of our resort and he taught me the basics of spreadsheet software - Lotus 123 was the most popular at that time.

He himself was very good at handling electronic spreadsheets.

From that encouragement of his, I was hooked on to numbers, spreadsheets and financial analysis.

However, numbers do scare the living day lights out of most managers who do not have a finance or accounting background.

They seem almost mystical.

By virtue of this mysticism, they are also thought of as “too difficult to understand.”

This is particularly if you are not an accountant or finance person.

There was this “fear” of numbers.

I am here to prove to you that this is far from the truth.

I am deliberately using the word “numbers” (and will continue to do so in my blog posts) to represent what normally is known as financial concepts or analysis.

It makes it less technical and as we shall see in this podcast less intimidating.

You will feel more at ease.

At the end of this podcast itself, you will stop fearing numbers, that is a promise.

About these Myths

The reasons why numbers (financial analysis) are considered something outside the realm of competency of an individual with a non-finance background are the myths that surround it.

The fact that the phrase “financial analysis” sounds very technical contributes to these myths.

That completes the aura of mystery. This is why I will use the word numbers instead.

Finance professionals and those with finance background have not helped the cause any by refusing to de-mystify financial concepts.

Perhaps, in their way of thinking, they hold the power of this knowledge and hence are reluctant to share it.

Numbers (financial analysis) can mean different things depending on how broad or narrow an interpretation of the definition we choose to take.

The term “financial analysis” in a narrow sense refers to:

“financial statements, reports or the process of evaluating businesses, projects, budgets and other finance-related entities to determine their suitability for investment.

Typically, financial analysis is used to analyze whether an entity is stable, solvent, liquid, or profitable.”

From a broader perspective, numbers (financial analysis) are simply any analysis of a financial statement or report which is expressed in dollar terms.

I will now explode 5 major myths about numbers (financial analysis) in this blog post.

You need a Degree in Finance to understand Numbers (Financial Analysis)!

By no stretch of imagination is financial analysis a generalized area or body of knowledge.

However, it is equally true that it is not something which requires a full degree in Finance to understand and utilize. 

The concepts underlying financial analysis are quite simple.

While a few of the terms need to be digested, a lot of the work can be achieved through logic and common sense.

This requires that a lay person approach is adopted while breaking down concepts into understandable chunks.

For example, cash flow is one of the many expressions that is used in financial analysis and which does sound technical.

However, if we chunk this down as “cash” and “flow” the intrinsic meaning becomes more clear.

All then is left to explain what flow means. In this instance, flow simply means the movement.

You need to be an Accountant to understand Numbers (Financial Analysis).

It is true that an Accountant is the individual tasked with the primary responsibility of producing financial statements.

As a result of that, he tends to understand financial analysis more quickly.

But it is definitely not true that one has to be an accountant to understand and utilize financial analysis.

This ease of understanding for the accountant comes from the umbilical cord connection between accounting (books of account) which are the source for production of financial statements.

However, any Business Manager who is responsible for results can pick up concepts of financial analysis without knowing any technical aspects of accounting.

In fact, it is true in most industries, that the head of the unit is a non accountant who is responsible for the results and performance of the unit.

Again, it is important the accountants make an effort to lift the veil that surrounds the concepts and make them simple to understand for those not from a finance or accounting background.

This is a responsibility that many of them unfortunately fail to carry out resulting in a deeper fear in the minds of the non-finance people.

You need to be a wizard in Math to carry out Analysis with Numbers

This is another of those classic myths.

A major part of the financial analysis exercise deals with numbers and figures.

As a result, people immediately jump to the conclusion that you need to be some kind of wizard in Math to carry out effective financial analysis.

This is as far from the truth as the first two myths which dealt with having a finance or accounting background.

Again, numbers and figures do behave in a certain manner and understanding those behaviors makes the analysis that much more impactful.

However, it has nothing to do with math per se.

I will even go as far to say that if you can do basic addition, subtraction, multiplication and division and have a working idea of percentages you are good to go.

People with non finance background cannot be good at Numbers (Financial Analysis).

This myth is purely the result of the handiwork of accountants and people with finance background.

They have resolutely refused to cede what they consider their territory.

However, as I said earlier, more business unit heads are those from a non-finance background and this in itself blows the myth that they cannot be good at financial analysis. 

Moreover, they are responsible for the performance and results of their unit.

You have to remember that the accountant merely produces the financial statements from the books of account.

He does not hold singular rights or for that matter mastery over their output.

I have regularly come across business unit heads with a non-finance background who have a very healthy head for finance and financial analysis.

By virtue of this, they have actually performed excellently.

It is something that can be emulated with a bit of effort and support from the accountants/finance people.

You need to master difficult technical terms (jargon) before understanding financial analysis

This is last of the five myths and a big one at that.

It is that you need to go through complicated technical terms before understanding financial analysis.

There are technical terms to be understood and used in analysis.

However, they are by no stretch of imagination impossible to understand.

And they are definitely not out of bounds for non-finance people.

As an accountant and finance person myself, I can without hesitation say that a good chunk of the understanding will come from logic and common sense.

And knowing cause effect relationships.

In fact, I would go as far as to say that knowing cause effect relationships will de-mystify financial analysis a great deal.

I have been using this approach to do just that in my blog posts and podcasts.

So, fasten your seat belts which is different from putting on life jackets which will frighten all and sundry.

This ride may be bumpy but I promise it will be exciting.

More importantly, at the end of it you will be as savvy in financial analysis as any of your esteemed accounting or finance colleagues. 

I promise it will not give rise to sleepless nights or hair pulling or head bashing.

In summary, none of the above  or any other myths about financial analysis is true.

As an accountant, I am in a position to categorically tell you that.

If you are an aspiring general manager, build The Ultimate 10 Tools in a Hotel General Manager Business Toolkit with the Mastering Hotel Finance Online Course.

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