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How to understand and analyse financial statements
To be on top of your game, it’s important to have an in-depth understanding of the financial performance of your business. How you finance your business can affect your ability to employ staff, purchase goods, acquire licences, expand and develop.
Your business financials are essential for lenders and investors who want to see hard figures before putting money into your business. Solid financials could help you get loans and attract investors.
Financial statements are your ‘go to’ documentation as they contain important information about the organisation’s operating results and financial position.
The relationship between certain items of financial data can be used to identify areas where your business excels and, more importantly, where there are opportunities for improvement.
Understanding and analysing financial statements will help you make much better business decisions.
Interpreting financial statements
The key to being across accounts is knowing how to understand financial statements: how they are prepared, what they tell you, and what they don't.
Properly prepared financial statements can help you analyse your business cash flow, profitability, gross and net margins, debtor and creditor position, and the net asset position of your business, amongst other things.
Once you do this, you'll see the total in your bank account is not necessarily the income you have earned. There is far more to profit than actual deposits in the bank.
To really comprehend where your business stands, it is critical to look at certain financial statements. Financial statements are generated by first organising, and then analysing, numbers from your accounting activities.
The essential business reports required to analyse your business' financial position include:
The balance sheet – this is a record of your business' assets, liabilities, and capital, at a specific point in time.
The profit and loss statement (or income statement) – this is the summary of your business' earnings, expenses, and net profit (or loss) over a specific amount of time.
The cash flow statement – this will show the actual inflows and outflows of cash coming into and out of your business.
There are other financial statements you may find helpful depending on your specific business, but the above three will give you sufficient detailed information with which to begin.
When you look at these financial statements, a lot of the mystery surrounding the finances of your business will disappear. In black and white, you will be able to see every dollar that has come into your business and every dollar that has gone back out.
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Key areas to analyse on a financial statement
The cash flow statement is important because it allows you to see how readily your company can meet all its commitments as they fall due. A company can be profitable, but if a lot of the revenue generated is from accounts receivable, the cash may not be available when liabilities fall due. Remember, "cash is king".
Your profit and loss is important because it gives you an idea of how profitable your company is overall. Via profit and loss, you can look at your margins and other ratios to see how it performs in terms of generating profit relative to other players in the industry.
Your balance sheet is more of a long-term view or track record of how the company is doing.
Understanding and analysing financial statements will help you make much better business decisions
Make your financial statement analysis useful
The analysis is one of the most important elements of a useful financial report because it helps you understand the dynamics of the balance sheet. While you need your business to be profitable, you also need to sustain growth and have available resources to be reactive to changing customers' needs and the changing market.
Effective financial management requires a regular and systematic analysis of the financial records, tracking performance against budgets and targets and adjusting strategies and financial management to meet changing circumstances.
Your analysis should look at the assets used to generate profit, including fixed assets and working capital. It should also consider the relationship of debt to equity in funding business growth. The analysis aims to highlight the relationship between operations and how you fund those operations.
Collecting and manipulating information in spreadsheets is simply not adequate for a growing business. You need to look for a system that will do the heavy lifting for you when it comes to gathering and analysing data.
You need a system capable of dealing with more complex information with less potential for error. Look for a system that can gather information from various sources such as excel, MYOB, point-of-sale (POS) and till systems, rosters, inventory lists and budgets, then integrate the data into one report.
This system should be able to gather and analyse data and delivers insight on a real-time, daily, weekly or monthly basis.
Above all, analysing your financial statements or reports is both essential and beneficial for your business, providing you with better visibility into your business' performance.
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