What is the proper basis for comparison of the financial analysis?

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The final part of the financial analysis is to establish a proper basis for comparison, so you can determine if performance is aligned with appropriate benchmarks. This works for each data point individually as well as for your overall financial condition.

The first basis is your company’s past, to determine if your financial condition is improving or worsening. Typically, the past three years of performance is sufficient, but if access to older data is available, you should use that as well. Looking at your past and present financial condition also helps you spot trends. If, for example, liquidity has decreased consistently, you can make changes.

The second basis is your direct competitors. This can provide an important reality check. Having revenue growth of 10 percent annually may sound good, but if competitors are growing at 25 percent, it highlights under performance.

The final basis consists of contractual covenants. Lenders, investors and key customers usually require certain financial performance benchmarks. Maintaining key financial ratios and data points within predetermined limits can help these third parties protect their interests.