Financial analysis is crucial when it comes to evaluating where your business currently stands and seeing how you can improve your future performance. Your ultimate goal is to use financial analysis to run the business more efficiently, and consequently, more profitably.
While a professional financial analyst can do a lot for your business, hiring one can be an expensive undertaking. Fortunately, you can apply the same principles for even the smallest business. Here is what to look at…
Obviously, the money you have coming in is what makes the biggest impact on how sustainable or successful your business is. By looking at the various ways money comes into the business and where it comes from, you should be able to reveal insights that can help you divert more of your resources to the most successful channels of revenue.
An analysis of revenue might also disclose risks to the business. For example, if you discover that a lot of revenue is coming from a single customer, then it might be time to start looking for new business in case that customer stops buying from you. This may also be an opportunity to look at your offerings and the strategies used by the business to differentiate products, in terms of uniqueness, profit margin, cost control and marketing.
Profits are essential to any business. If you don’t consistently make a profit, you won’t stay in business. It’s that simple. Your income must cover your expenses. Anything left over is profit. If you’re just breaking even, or worse, then you might have to review your pricing strategy. Regardless, it’s a good idea to channel some profit into a fund for unexpected emergencies or purchases for the business, so this needs to be factored into your pricing model.
It’s worth pointing out here, that operating expenses do not include taxes. It’s a good idea to set up a separate account in which to channel your tax liabilities for each month, so you know exactly what’s left over for reinvesting into the business. KoalaPays can help with this by providing ‘spaces’ or separate accounts for segmenting taxes and other expenses.
One of the key drivers for profitability is operational efficiency. The more efficient your company is in terms of productivity, costs and business processes, then the more profit you’ll have left over after operational expenses.
Two important figures to look at here are accounts receivable turnover and inventory turnover. If your account receivable turnover is low, then it might be time to look at how you can improve your credit control procedures in order to get money flowing into the business more quickly. Likewise, a fast turnover of inventory means that you’re selling well and you aren’t creating more product than you can sell. Getting the right balance here is important as storing product that isn’t moving is an expense in itself.
The tools to getting the insights you need are your financial statements. These should tell you a lot about how your business is doing. Key figures to examine include asset management and liquidity, profitability, debt, risk and market valuation. Look for trends that stand out, such as fluctuations from previous figures – relative to industry averages or other general economic factors.
Make sure you critically examine how you arrive at all of these figures. It’s here where accounting irregularities can come to light.
When this has been completed, you should have everything you need to make forecasts for future financial statements. At this stage, you should also be able to put a valuation on the business, which could be useful, if, for instance, you want to borrow for the business.
More importantly, however, you’ll know whether business performance is improving, or worsening. If it is the latter, you’ll have the insights you need to create an action plan to resolve those issues.