People in the company examine how stable, solvent and profitable business or any project of the company and these assessments are carried out by examining the income statement, balance statement and cash flow statement of the company. A person after assessing the company’s performance by using financial data present findings to top management of a company with the recommendations about how it can improve in the future.
It is also used to evaluate economic trends, set financial policy, build long-term plans for business activity, and identify projects or companies for investment. This is done through the synthesis of financial numbers and data. A financial analyst will thoroughly examine a company’s financial statements—the income statement, balance sheet, and cash flow statement.
Financial health is one of the best indicators of your business’s potential for long-term growth. The Federal Reserve Bank of Chicago’s recent Small Business Financial Health Analysis indicates business owners knowledgeable about business finance tend to have companies with greater revenues and profits, more employees and generally more success.
The first step toward improving financial literacy is to conduct a financial analysis of your business. A proper analysis consists of five key areas, each containing its own set of data points and ratios.
Make Sense Of Your Financials
Revenues are probably your business’s main source of cash. The quantity, quality and timing of revenues can determine long-term success.
If you can’t produce quality profits consistently, your business may not survive in the long run.
Operational efficiency measures how well you’re using the company’s resources. A lack of operational efficiency leads to smaller profits and weaker growth.
Basis For Comparison
The 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. This works for each data point individually as well as for your overall financial condition.
The first basis is your company’s past, to 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. If, for example, liquidity has decreased consistently, you can make changes.
The second basis is your direct competitors. This can provide an important reality check. Having a revenue growth of 10 percent annually may sound good, but if competitors are growing at 25 percent, it highlights underperformance.
The final basis consists of contractual covenants. Lenders, investors and key customers usually require certain financial performance benchmarks. Maintaining key financial ratios and data points within predetermined limits can help these third parties protect their interests.