What does 'financial analysis' involve?

Financial analysis primarily involves assessing past financial performance to make informed decisions about future actions. By examining historical financial data, analysts can identify trends, measure profitability, and evaluate operational efficiency. This process is crucial for stakeholders, including management, investors, and creditors, as it provides insight into the financial health of an organization and informs strategic planning.

The focus on past performance allows organizations to learn from previous successes and failures, which can guide budgeting, forecasting, and overall financial strategy moving forward. Through this analysis, decision-makers can determine which areas are performing well and where improvements may be necessary, enhancing the company's ability to allocate resources effectively and achieve its financial goals.

In contrast, other options, while related to financial activities, focus on different aspects of financial management that do not encapsulate the full essence of financial analysis itself. For instance, creating sales forecasts is a forward-looking activity, establishing budgets pertains to setting financial plans rather than analyzing past performance, and preparing raw financial data for audits reflects compliance and accuracy rather than performance assessment.