Financial analysis is a major component of both a business plan and a feasibility study. It is also an essential component of an on going assessment of how the business is operating compared to financial projections (over time) and compared to similar businesses or industry averages.

Financial analysis will generally consider the following financial criteria:

• Liquidity: the ability to meet short term debt obligations as they come due.
• Solvency: the ability to meet all on-going debt obligations. A business that is insolvent has more debt than assets and cannot meet its current debt obligations as they come due.
• Profitability: a measure of the financial return related to the various assets used.
• Efficiency: a measure of the ability of the business to control costs.

These four financial criteria are measured using various ratios and by reviewing the financial statements.

A financial analysis will provide information related to the overall health of the business and will highlight any area of concern before it becomes critical.