Along with producing a viable business plan, financial analysis is crucial for the daily management of a company. It isn’t possible to plan ahead unless you have financial data so that you can create a strategy.
Financial analysis consists of many aspects, including the profit and loss statement and budgeting. The analysis will indicate the profitability of a company, in addition to its stability and viability, accurate data can only help a business owner to make sound business decisions.
What is financial analysis?
Information from financial statements and other reports will be used for analysis of the company’s performance. Operational and financial decisions will be made using the data collected, often by management accountants. The information taken from various financial statements is used for benchmarking, comparing with a competitor.
Performance of a company
Financial analysis is used to compare the planned performance of a business with the actual results. The business plan outlines goals, expectations and strategy, which are then compared after a specified length of time. Financial statements can be compared to the financial forecasts and projections used in the business plan. If the actual results are different to planned, use the information to locate the reason. You may want to know why you had more or fewer sales than planned, or why some costs were far greater than expected.
Trends
You can use current financial information to compare with previous statements and see how the business has developed. By determining which areas of the business have changed, you can identify the current trends. If you spot new trends, make changes to your business plan to accommodate them.
Comparison
Financial analysis includes benchmarking where the company is compared to others in the same industry. The current financial statements will also be used to compare against expectations held by investors and bankers for the company.
Ratios
The strength of the company can be ascertained by using balance sheet ratios. There are various ratios used to calculate the strength of current cash flow, working capital, turnover, profit and loss. Some of these ratios will be used by any lenders when applying for funding, especially the working capital ratio as this may influence the amount loaned.
Financial analysis is complex and is time consuming, but it does mean that decisions can be based on fact rather than forecasting. Maintaining control of financial analysis is crucial and is often outsourced to a professional. If you would like to discuss any aspect of financial analysis without obligation, please contact us.