Ask Us How: Analysing Business Financials
Published on October 16, 2013 under NSW Business Chamber Partnership
Although Australia seems recession proof and the economy is generally improving, it’s so important that business owners are on top of their game and are completely across the financial performance of their business.
Many business owners have not been schooled in accounting and often have a limited understanding of how financial analysis can help them manage their businesses effectively.
It is important to make the best use of all the information contained in your financial reports.
Importance of business owners understanding business financials
Financial statements are more than a simple listing of business income and expenses. Appropriately prepared financial statements can show you the cash flow of your business, any outstanding debts, and the value of your assets. Basically, once you do this, you'll see that the total in your cheque book is not necessarily the income you have earned. There is far more to income than actual deposits in the bank.
To really comprehend where your business stands, it is critical to look at certain financial statements. Financial statements are generated by first organising, and then analysing, numbers from your accounting activities. You'll want to start with the two primary financial statements, which are your Profit and Loss Statement, also called an Income Statement, and your Balance Sheet. After which, you may want to delve deeper, and look at your Cash Flow Statement, as that will show you exactly where your cash is coming from and then where it is going.
Essential business reports to analyse your business’s financial position
The most important reports include:
The Balance Sheet – this is a record of your business's assets, liabilities, and capital, up to a specific point in time.
The Profit and Loss Statement (the Income Statement) – this is the summary of your business's earnings, expenses, and net profit (or loss) over a specific amount of time.
The Cash Flow Statement – this will show the actual inflows and outflows of cash coming into and out of your business.
There are other financial statements that you may find helpful; depending upon your specific business, but the above three will give you detailed information in which to begin. When you look at these financial statements, a lot of the mystery surrounding the finances of your business will disappear. In black and white, you will be able to see every penny that has come into your business and every penny that has gone back out.
Key areas businesses should analyse on these reports
The cash flow statement is the most important because it allows you to see how readily your company can meet its debt and interest payments. A company can have a strong P/L, but at the end of the day, if a lot of the revenue generated is from accounts receivable, the company can still fail to meet its debt obligation. "Cash is king".
P&L is important because it gives you an idea how profitable your company is overall. Via P/L you can look at your margins and other ratios to see how it does in terms of generating profit relative to other players in the industry.
Balance sheet is probably the third statement you need to look at. It's more of a "long-term" view, or track record of how the company is doing.
Benefits for businesses who understand and are across their financial position
Timely financial reporting creates benefits during the financial year and also when the accounts are prepared. Timely financial reporting allows you to focus on current issues and future plans by improving financial systems and improving the quality of financial information, as well as:.
Improved financial management - Timely financial reporting helps you to examine and correct any weaknesses in your financial systems. Publishing accounts with a clear audit opinion is an indicator of good financial management. Improved financial management allows you to focus on current financial matters and future plans.
Better resource management - The systems and processes which you develop for timely financial reporting will improve your in-year financial management information for example, through automating your processes. This allows you to make decisions based on up-to-date information and leads to improvements in the use of resources. There is every likelihood that demands placed on finance staff will be less subject to seasonal fluctuations as timely financial reporting requires a more balanced work program with greater emphasis on in-year financial management.
Timely production of accounts - The production of financial statements with a clean audit report provides everyone with assurance of good financial governance. This enhances a company’s ability to plan for the future and support budget setting arrangements.
Why your business financials are important
Your business financials are essential for lenders and investors who want to see hard figures before putting money into your business. Solid financials could help you get loans and attract investors, even if you aren't operating yet.
It takes money to make money, so businesses have to consider their finances for many purposes, ranging from survival in bad times to bolstering the next success in good ones.
How you finance your business can affect your ability to employ staff, purchase goods, acquire licenses, expand and develop. While finances are not necessarily as important as vision and a great product, they are crucial to making the good stuff happen.