Areas to Control A-G

Control - Financial Position

Why do 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.

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.

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.

Ratio Analysis for Control
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.