Financial Analysis
Financial analysis is the process of evaluating businesses, projects, and budgets to determine their performance and suitability. Financial analysis is used to analyze whether an entity is stable, solvent, liquid or profitable to guide management decisions.
Financial statements are used examine past and current financial data so that a company’s performance and financial position can be evaluated and future risks and potential can be estimated. It is important for small business owners to understand and use financial analysis because it provides one of the main measures of a company’s success.
Financial health is one of the best indicators of your business’s potential for long-term growth. business owners who are knowledgeable about business finance have greater revenues and profits. statements allow analysts to measure liquidity, profitability, company-wide efficiency, and cash flow.
Maintain key financial ratios. Lenders and investors require certain financial performance benchmarks.
Improving Financial Literacy
Conduct a financial analysis of your business. A proper analysis consists of six key areas.
1. Revenues are probably your business’s main source of cash. The quantity, quality and timing of revenues can determine long-term success.
2. Profits If you can’t produce quality profits consistently, your business may not survive in the long run.
3. Operational Efficiency measures how well you’re using the company’s resources. A lack of operational efficiency leads to smaller profits and weaker growth.
4. Capital Efficiency and Solvency are of interest to lenders and investors.
5. Liquidity analysis addresses your ability to generate sufficient cash to cover cash expenses. No amount of revenue growth or profits can compensate for poor liquidity.
6. Comparison is final part of the financial analysis is to establish a proper basis for comparison, so you can determine if performance is aligned with appropriate benchmarks.
The Financial Analysis Review
We will establish a proper basis for comparison, so you can determine if performance is aligned with appropriate benchmarks.
Determine if your financial condition is improving or worsening. Typically, the past three years of performance is sufficient, but if access to older data is available, you should use that as well. Looking at your past and present financial condition also helps you spot trends.
Measure your business against your direct competitors. This can provide an important reality check. Having revenue growth of 10 percent annually may sound good, but if competitors are growing at 25 percent, it highlights underperformance.
Maintain key financial ratios. Lenders and investors require certain financial performance benchmarks.
