How to carry out a financial diagnosis in 4 steps

The more often you review your company's finances, the more likely you are to find opportunities for growth. But how should you approach that review? Which documents should you analyse? What exactly should you be looking for? Let's try to answer these questions by looking at the financial diagnosis.

Financial diagnosis: definition and objectives

Carrying out a financial diagnosis is like giving a company a health check. This in-depth analysis measures its economic health at a given point in time, detects any imbalances and identifies the levers to pull to improve performance.

A financial diagnosis rests on a study of the company's accounting documents (balance sheet, income statement, cash flow statement and so on), but also on key indicators such as profitability, solvency and self-financing capacity. It gives a clear, structured view of a company's financial situation, whether it is growing, stagnating or in difficulty.

This strategic tool is not reserved for chartered accountants or financial analysts. It also matters to managers, entrepreneurs, investors and banking partners, who use it to make decisions: launching a new investment, applying for financing, adjusting a pricing policy or rethinking a development strategy.

How do you carry out a company's financial diagnosis?

A financial diagnosis is a serious matter that relies on a rigorous method. It is built around several key steps that give a complete picture of a company's economic health.

It all starts with the analysis of the fundamental accounting documents: the balance sheet, the income statement and the cash flow statement. These financial statements give a first snapshot of the business, the capital structure, the investments made, the debts and the company's ability to generate profits.

Next, the main components of the balance sheet are studied. The aim is to distinguish the key items: fixed assets, current assets, equity, short-term and long-term debt, and so on. Reading the balance sheet in this way makes it possible to assess the company's solvency and spot any financing imbalances. Particular attention is paid to working capital, working capital requirement (WCR) and net cash.

Ratios are also essential indicators for comparing performance over time or against companies in the same sector. Among the most widely used are return on assets and return on equity, the debt ratio, the current ratio, the trading margin and the value-added rate.

But a good financial diagnosis does more than line up figures. It puts the data into perspective, taking account of the sector of activity, the economic climate, the size of the company and its strategic objectives. This step identifies strengths, weaknesses, opportunities and threats from a financial point of view.

Tools and indicators for an in-depth financial diagnosis

To go beyond a simple accounting review, the financial diagnosis draws on a combination of analytical tools and key indicators that make it possible to interpret a company's performance and strength in depth.

The functional balance sheet: it reorganises the items of the accounting balance sheet according to their function (investment, financing, operations) and makes it possible to analyse the long-term financial structure.

The contribution income statement: by separating variable and fixed costs, it gives a finer view of operating profitability.

The cash flow statement: it traces the cash movements linked to operations, investments and financing, and identifies the company's ability to generate cash.

The financial SWOT analysis: by cross-referencing internal data and external factors, it helps to identify levers for improvement or risks to monitor.

Working capital (WC): it measures the company's ability to finance its operating cycle over the medium term.

Working capital requirement (WCR): it assesses the short-term financing needs linked to the business.

Net cash: the difference between WC and WCR, it indicates the liquidity available.

Profitability ratios: such as net margin, EBITDA margin (earnings before interest, taxes, depreciation and amortisation), return on investment (ROI) or return on equity (ROE).

Solvency and debt ratios: such as the debt-to-equity ratio, which reflects the company's financial strength.

Turnover ratios: average storage time and customer or supplier payment terms, which shed light on the management of the operating cycle.

Who can carry out a financial diagnosis, and when?

A financial diagnosis can be carried out by different profiles, depending on the size and complexity of the company. Internally, it is often entrusted to the chief financial officer (CFO), the management controller or the accountant, provided they have the necessary technical skills. In SMEs or growing businesses, calling on a chartered accountant or an external financial adviser provides an independent, strategic perspective, often valuable in phases of transition or transformation.

This type of audit is particularly relevant at certain key moments in a company's life: during a fundraising round, a major investment project, a restructuring, an acquisition or a disposal, or as part of a recovery plan. But it can also be carried out regularly as a preventive measure, to manage performance more effectively and anticipate financial risks. Regular financial diagnoses are in fact strongly recommended.

The Master in Corporate Finance offered by EDC Paris Business School trains experts who can manage financial performance, optimise profitability and carry out sophisticated financial diagnoses. It is aimed at students who wish to move into positions of responsibility in corporate finance, management control or consulting.

For those looking for complementary expertise, several other programmes are also available: the "Finance for Managers" Certificate, to master the fundamentals of financial management, and the Master in Audit & Management Control, to develop a cross-functional and rigorous approach to performance management.

Building the financial diagnosis into a strategic vision

The financial diagnosis should not be seen as a one-off analytical tool. Built into an overall strategic vision, it becomes a real lever for steering, decision-making and value creation. By identifying the company's structural strengths and weaknesses, it makes it possible to adjust strategic direction, whether that means external growth, cost optimisation, a review of the business model or investment in new projects.

Far from being reserved for critical situations, the financial diagnosis is best carried out regularly and shared with key stakeholders (senior management, shareholders, financial partners). It helps to secure decisions, anticipate drift and align operational management with medium and long-term objectives. In this sense, it plays a key role in building a high-performing, agile and resilient company.

Regularly analysing your financial statements, and comparing your actual results with your plan or forecasts, helps you stay in control of your company's finances. But remember to keep an eye on your market too: it is always a good idea to examine financial changes in your sector and any other external factor likely to affect your financial performance.