Question

Do you believe that it is important for professionals in finance to have a working knowledge of some of the statistical techniques and analytical techniques used in financial analyses such as:

Forecasting

Regression

Decision Tree

Breakeven Analyses

Answer 1

Finance is a stream where everything is measured in money, whether it is a stock market or production or profit for a period. Everything is dependent on numbers and percentage calculations. Since everything is dependent on numbers and everything is measured in money, a professional working in finance should have some knowledge of techniques and tools which could help him to work effectively, efficiently, and faster than others. Let us talk about some of them -

1. forecasting :-

Finance forecasting is estimation of how a business or a project will perform in the future. By using historical data of company and some external information and internal data of the company the person can forecast about the financial outcomes in a predefined period of time. The most used source for financial forecasting is Statement of Income. By using this statement a person can forecast future results for contents of statement of income, e.g. Revenue, Expenditure, Overheads,etc.

2. Regression :-

Regression is a statistical tool used in field of finance. In this technique we try to determine the strength and character of relationship between a dependent variable and a series of independent variables. Regression helps to determine relationships between variables such as commodity prices and the stocks of businesses dealing in those commodities. The types of Regression is Simple Linear Regression and Multiple Linear Regression.

3. Decision Tree :-

Decision tree is a major component of finance. Statistical representations by Decision Tree is integral part of corporate finance and forecasting. Decision tree uses a flow of information and possible decisions on the basis of information at every step and process. The most simple example of Decision Tree is flow of Tax for A person on his income. By using it calculation of Tax payable for any income can be done easily in very less time. Decisio tree plays very important role in the decisions of capital budgeting and capital decisions.

4. Break even Analysis :-

Break even analysis is used to determine the level of production or sales for a desired sales mix. It is being calculated by dividing Total fixed costs by Sales price per unit less Variable Cost per unit. The difference between Sales price per unit and Variable cost per unit is known as Contribution Margin. Break-even analysis is also used by investors to determine at what price they will break even on a trade or investment. The calculation is useful when trading in or creating a strategy to buy options or a fixed-income security product.