Financial Analysis

What is Financial Analysis?
Financial analysis is to do with charting the progress of your business. To do this you have to be familiar with the various forms of financial statements, analysis and measurement and unless you have experience with financial statements, or unless you are an accountant, it might be best to leave the financial analysis side of your business to your advisers.
" Ask your accountant to financially analyse your business ..."

Financial analysis will include areas known as ratio analysis, which enables you to spot trends in your business and to compare your performance with the performance of similar businesses in the industry. This involves comparing your business ratios with the business ratios of similar businesses over time and then closely watching the trends that show up.

Financial analysis provides the all-important indicators of how your business is running, which will enable you and your managers to address business problems before they cause you loss or threaten the survival of your operation.

Why is Analysis Necessary?
Most business owners are “up to their neck” working at running their businesses and do not have much time to analyse how they are going. They leave the analysis of their financial position to their accountant or other financial advisers, because they are totally tied up with the day-to-day operation. They have to give their time to increasing sales, keeping production going and ensuring that staff members are happy.

Many accountants include financial analysis as part of the duties they perform for their clients, but unfortunately this is only carried out once a year or at the very best every six months. This means the results arrive too late for the business owner to be able to correct any mistakes or problems that may arise.

In any event, if you were concerned with improving the profitability and performance of your venture, it would be a sound move to ask your accountant or financial adviser about arranging financial analysis of your operation. This will show you what you are doing, how you are doing it and whether you can improve your business.

Analysis of your Financial Records
When analysing your financial statements, make sure that all the items are carefully examined.

Some questions that need to be answered are:

  • Why are certain expenses at a particular level?
  • Do you need to incur those expenses at all?
  • Is there any way to reduce or avoid certain costs?
  • Does the level of your profit justify the investment of your time and effort into your business?

Any financial items of significant amount should be analysed regularly because a minor error with big figures can cause your business a big loss. For example, continually examine your payroll and compare its costs with the total administration expenses.

Analyse Ratios
Accountants and other finance professionals use various ratios to evaluate your financial statements because these ratios will point out the position of your business as to liquidity, profitability and solvency.

  • Liquidity: These ratios will indicate how much cash you have on hand and what is available to ensure that you have sufficient to pay your debts when they are due.
  • Profitability: These ratios will indicate how your business is performing.
  • Solvency: These ratios indicate your business’s ability to meet its debts when they fall due.

How to Analyse Financial Statements
Financial statements are analysed by looking at the comparisons and ratios to assess any trend or the relationships of the results of one period to another. The analysis should be carried out as soon as the financial statements have been accurately completed for a period, for the business.

One of the first analyses to be made is to compare the financial statements recent results with those of the past three years. Look at any obvious trends, or any significant changes. Every item on the financial statement should be studied in detail. Look at the changes from one year to another and compare them by first converting them to percentages.

Take the net sales figure as 100% and then relate all other items, including costs, as a percentage of that net sales figure. On the balance sheet, total assets are taken as 100% and all other items are related as a percentage of total assets.