If you want someone to invest in your company, you need to convince them why it is a sound investment. You must back up your claims with strong financial data. To show investors why your business is a good investment, develop a financial analysis report.
Financial health is one of the best indicators of your business’s potential for short-term and long-term growth. ProKakis realises that business owners who have knowledge about business finances tend to build companies with greater revenues and profit. There is better control on human capital management and would inevitably generate more success when we can compare the business in relation with previous periods of time and how the company’s success is relative to other rivals in the sector.
Most companies rely on their own accountants or even outsourced accountants to conduct their financial analysis for them as usually, they are busy with the operations and management aspects of the business.
How to conduct a financial analysis report
Follow these five steps to conduct a financial analysis report for your small business.
Step 1: Gather financial statement information
The very basis of an analysis is collecting a range of data to compare to which includes previous year’s;
· Balance Sheets
· Cash Flow Statements
· Income Statements
· Shareholders equity statements
These financial reports can be found in a recent annual report that the company has in possession.
Step 2: Tabulate ratios
Calculate ratios that give a snapshot of your business’s financial health.
Find what ratios matter most to your business. Add your ratios and calculations to your financial analysis report. Calculate the top 5 financial ratios and compare it with the company’s key competitor’s data.
a) Debt-to-Equity Ratio indicates the proportion of equity and debt used by the company to finance its assets.
Total Liabilities / Shareholders Equity
b) Current Ratio is also known as cash asset ratio, cash ratio, and liquidity ratio. A higher current ratio indicates the higher capability of a company to pay back its debts. The formula used for computing current ratio is:
Current Assets / Current Liabilities
c) Quick Ratio is also known as “quick assets ratio”, this ratio is a gauge of the short term liquidity of a firm. The quick ratio is helpful in measuring a company’s short term debts with its most liquid assets. A higher quick ratio indicates the better position of a company.
(Current Assets – Inventories)/ Current Liabilities
d) Return on Equity (ROE) is the amount of net income returned as a percentage of shareholders equity.
Net Income/Shareholder’s Equity
e) Net Profit Margin shows the efficiency of a company at its cost control. A higher net profit margin shows more efficiency of the company at converting its revenue into actual profit.
Net Profit / Net Sales
Step 3: Scan for large movements in specific items in Revenue and Expenses
Analyse and review these financial statements and ratio
Ask yourself these questions
“Was there any jump in revenue or debts during the period?”, “Did the fixed assets grow from one particular year to the next?”
Look for unusual activities too. When something springs at you, check out what you know about the company and figure out if an object seems suspicious. For example, has the company sold off any of its primary activities?
Step 4: Conduct a Risk Assessment
How risky is your business? Investors and business owners to conduct risk assessment to identify whether it is a worthy investment or whether it is facing imminent cashflow or operation issue. Many companies fail due to lack of cashflow in overtrading. Some company spend too much money on marketing and reduce the operation expenditure. When operations’ workers and infrastructure starts to deteriorate, good is wasted due to ineffective inventory control.
You can analyse your business’s risk by doing the following:
· Identify risks
· Document risks
· Identify individuals to monitor risks
· Determine controls to reduce risks
Step 5: Review the Dividend Payout.
The Dividend per share (DPS) calculates the proportion of a firm’s net profits in the form of dividends paid to each shareholder. DPS can indicate how profitable a company is over a fiscal period and it can tell an investor about the company’s past financial health and its current financial stability.
Dividends per share (DPS) is an important financial ratio in understanding the financial health and long-term growth prospects of a company. A steady dividend payment signal stability. A declining DPS may be due to reinvestment in a firm’s operations but may also indicate poor earnings and be a red flag for financial cashflow.
Evaluate all the data generated from previous steps periodically
You have successfully performed a financial analysis on your company. With the evaluation and all the information at hand, you and your stakeholders are now capable of making more informed business decisions based on careful and meticulous planning through financial analysis.
Keep in mind that there are other steps you can take along with these steps to get a deeper understanding of the meaning of the company’s numbers and how they impact performance and growth such as KYB Due Diligence and even using Social Listening tools to get a broader perspective on your customer base.