What if the numbers you trust so well are wrong? What if, that glossy investor pitch, the pristine credit rating, the analyst report that confidently proclaims “Strong Buy”, and every other number you trust as the financial signpost to make your investing or lending decision, was skewed by bias, misinterpretation, or manipulation!
In a world where financial information is abundantly available, and investment opportunities pop up at the speed of light, one would think that evaluating financial information would be an easy and more transparent process. But more data doesn’t always necessarily mean more clarity. Whether you are a lender deciding to approve a loan or an investor looking for your next big bet, relying only on someone else’s financial information analysis is a gamble in itself. Your best bet is to analyze financial information independently with the help of emerging tech like Gen AI.
In this blog, we will explore why going solo with financial analysis is a powerful move, the dangers of blindly trusting third-party evaluations, and how Gen AI is enabling better financial decisions.
Why Independent Financial Information Analysis Matters
Independent financial decisions are way more than a safety net. These decisions give you better control over the entire analysis, giving you a better picture of the borrower’s financial situation. Making smart financial decisions requires more than just reading a few reports or trusting someone else’s summary. You need to look under the hood if you wish to understand the actual story behind the numbers, and independent financial analysis helps you do just that. Here’s why it is important –
1. Conflict of Interests
Credit rating agencies have often been seen to give favorable ratings to businesses that pay for their assessments. Just like some financial advisors might push products that earn them higher commissions. Hence, relying blindly on third-party reports or credit ratings without doing your due diligence, may increase the risk of bad financial decisions.
Always consider the potential of biases behind third-party reports. Analyzing financial data independently helps you sidestep these conflicts and form an objective opinion based on the raw data available to you.
2. Lack of In-depth Insights
Understanding the full context behind the numbers requires digging deeper into the income statements, balance sheets, and cash flow reports along with the footnotes. You can not simply take the numbers for their face value. Without the right context, it’s impossible to know the rate at which a business might be growing, or if they are burning through cash.
When lenders and investors analyze financial information independently, they learn how different pieces of information relate to each other, making them better equipped to ask the right questions and to spot red flags.
3. No Room for Personalisations
You can not expect a third-party analyst or financial advisor to build a borrower’s risk profile based on your strategic goals. As long-term lenders, you would understand that no two lenders or investors would have the same risk taking capacity. What may seem like an opportunity to some, might seem like a financial nightmare to another. Personalizations play a key role in this situation, which is only possible when you take charge of analyzing financial information, either with the help of your financial advisors or using modern tech like Gen AI tools, that make your work easier.
When you analyze the numbers yourself, you get to frame the data according to your risk profile, build models that best suit your goals, apply your assumptions, and make decisions that align with your end goals.
4. Extensive Use of Generic Models
The cookie-cutter models may not necessarily work for your business as they miss considering different nuances. Since every business is unique, you require financial models that use specific assumptions while analyzing data. Market conditions, regulatory landscapes, and competitive dynamics all play an important role in determining whether a lending opportunity is viable or not.
Independent financial information analysis lets you tailor your approach to your goals. This way you can also stress test a company against inflation pressures or against the impact of foreign exchange fluctuations.
Cases Where Lenders and Investors Relied on External Analyses
We are not professing that external insights or third-party analytics are useless. No. They are extremely useful as starting points, or to make your job easier, but to rely on them entirely for making crucial decisions is where the problem begins.
There have been numerous popular cases where lenders and investors relied completely on analyst reports, credit ratings, or even summaries to make their decisions, and had to face adverse consequences.
One such popular case is the “WeWork IPO Fiasco”., where in 2019 WeWork filed for an IPO with an evaluation that touched the skies. But what appeared gold to investors from afar, turned out to be a heap of massive losses, questionable corporate structure, and an overreliance on risky leasing models. The investors got dazzled by the numbers, without digging deeper into the story behind those numbers. Sooner, the IPO got pulled from the stock market, with their once charismatic chairman Neuman stepping down and WeWork’s valuation plummeting to an all time low.
Cases like this serve as a wake-up call for lenders and investors to stop relying on third-party credit reports and start doing their own research before making any decision.
Gen AI: Your Ally in Financial Data Analysis
Independent financial analysis doesn’t necessarily have to be daunting or time consuming, especially in today’s data-heavy information-dominated world powered by AI. Thanks to the advances in Gen AI. Models like those built on GPT-4 and beyond can easily process large sets of financial data quickly, giving you in-depth insights, generating summaries, identifying trends, and even suggesting the right questions to ask potential borrowers.
Here’s how Gen AI makes analyzing financial statements a cakewalk –
Easy Data Extractions and Summarisation
With Gen AI tools by your side, you can upload a 100 something page financial report and get a clear summary of all the key points, along with any footnotes. It not only helps you understand how a business is doing financially, but it also helps in generating predictive patterns of how it may perform in the future, and under varying circumstances like inflation, etc.
With the right Gen AI tools, you can automate metrics like revenue growth, debt levels, and profitability ratios.
More Personalised Approach
With Gen AI tools, you can take a more personalized approach towards financial information analysis. You can model different scenarios based on your business requirements, and ask AI to simulate those scenarios to get a quick forecast of the company’s performance.
This personalized approach helps you stay ahead and reduce dependency on the cookie-cutter models used by external agencies.
Comparative Analysis
Leveraging cutting-edge Gen AI tools helps you compare the financial performance of a company across competitors or industry benchmarks. An extensive comparison like this helps you understand where a borrower company stands in the market and against its competitors, which is always a plus point when making investment decisions or lending.
Natural Language Queries
Gen AI tools are built on natural language models which makes it easier to ask even the most generic questions and get a well reasoned answer. Not just a yes or no answer, but a detailed one with context and instances to support it. Within seconds, it can synthesize years of financial history, industry benchmarks, and real-time indicators to provide an answer that is nuanced, data-backed, and tailored to your query.
Detecting Irregularities
Gen AI models also help in detecting anomalies within financial statements. In heaps and heaps of data, where human eyes can hardly figure out abnormalities, AI tools can easily suggest if the data has been tampered with. Gen AI models can catch irregularities in financial statements that may indicate fraud or creative accounting.
Gen AI is like a super smart assistant that can follow instructions to the T and help you with the independent analysis of financial information, however, this doesn’t mean that Gen AI can replace human judgment. Instead, it only enhances your ability to make better and faster decisions and removes hours of grunt work so you can focus on the critical aspects of the process.
Final Thoughts
The world of finance is full of noise: market chatter, biased reports, dazzling growth narratives. In that chaos, your clearest signal is your own informed judgment. Being able to think critically and independently is the true measure of a lender’s ability to stand out and make the right financial decisions. Plus, with the help of the right Gen AI tools, you can analyze dense reports, test assumptions, and visualize risks in ways that were once limited to professionals. With cutting-edge AI tools, You don’t need a background in financial modeling or a Wall Street pedigree to ask smart questions and get meaningful insights.
One needs to understand that shiny growth metrics can not cover up a flawed business model. So, next time before relying on someone else’s verdict, dig into the data yourself, use AI to enhance your analysis, and come to an independent conclusion that could help you make the right financial decisions.
