Whether you’re looking forward to an end-of-year business review or need an accurate business valuation to sell off your business, conducting an effective financial analysis is an essential step. It’s a meaningful way of evaluating current company performance compared to how it has been doing in past periods and how it stands against other key players in the market. When you know exactly where your business stands, it becomes easier to improve and achieve strategic business goals.
Here are some expert tips on evaluating the financial health of your business:
Step 1: Gather the Necessary Documents
For the last three to five years, collect your company’s financial statements, which include Income Statements, Balance Sheets, and Cash flow Statements. In addition, collect any budgets and forecasts you formulated during the last year.
Step 2: Analyze Your Income Statement
Also known as a Profit & Loss Account, your income statement includes the details about your income and expenses for a given year. Compare it with past years’ income statements as well as with your budgets. This will help you determine whether or not your profitability is improving and if your expenses are in line with your budgets.
Based on the insights gained, you can then look for ways to boost your profitability and minimize your expenses.
Step 3: Review Your Cash Flow Statement
Regardless of how fast your profitability improves over the years, without sufficient operating cash in hand, your firm can easily go bankrupt. This emphasizes the importance of company solvency. Closely scan your cash flow statement, which shows how cash moved in and out of your business. Then, compare the statement with your cash flow forecast. This should help you discover whether things are going as planned or not and whether you’re on track to grow your bank balance.
Step 4: Study Your Balance Sheet
Your balance sheet is among the most critical financial statements that shows how much your business is worth. It provides a comprehensive overview of the assets and liabilities your business has, helping you understand:
- How much money you owe and how much you’re owed.
- Whether you’re taking on more debt than planned.
- Whether you’re collecting payments from customers quickly enough, and more.
Take any corrective actions that might be necessary.
Step 5: Study Industry Standards
Finally, go beyond an internal check by conducting a market analysis. Check out industry benchmarks to determine how your company’s financial health or position stands against your competitors. Moreover, consider any external factors or financial shifts that might be affecting your company’s financial performance.
While there are myriad things to consider when conducting a strategic financial analysis for a company, if you’re pressed for time, follow the aforementioned five steps. We truly hope that this guide helps you achieve a true picture of your company’s financial health. For deeper insights into conducting financial analysis, contact Intellinz.