How to Analyze Your Business Financials
Updated: Sep 28, 2020
As a business owner, you see a lot of numbers from day to day. As you look at your financials, it may be overwhelming to make sense of everything. Today, we talk about the importance of regularly analyzing your finances and some easy tricks to do it!
Organization is a must for any business owner, but it especially applies when looking at your business finances. Keep your receipts in organized folders, both digitally and physically if possible. It’s important to have backups and backups to your backups, too! While this may seem daunting, it will make it simple for your finance department to quickly pull together your statements. Keep in mind that cash flows matter, too!
In addition to keeping detailed records of money in and out of your company, create financial statements more often than necessary. Depending on the type of industry you’re in, you may have seasons of more or less revenue. By keeping detailed notes, you’ll be able to analyze periods of more prosperity and plan accordingly to cover costs during your off-seasons.
At a very basic level, prepare a monthly income statement. While balance sheets and cash flow statements are especially important if you’re sharing with outside investors, keeping up with monthly income statements can help you find trends you may not have previously noticed.
Compare and Contrast
You are more than just your numbers, and that’s an important factor Adam Kae & Associates recognizes with each of our clients. Think of the other factors your company encompasses: customer services, marketing, accounting, and more. While you may not have a separate department for each of these, they can become crucial factors to consider in cutting costs and increasing revenues. For example, you may be investing a significant amount to a marketing initiative that isn't receiving a strong ROI. Here's an opportunity to review areas to cut costs with your marketing manager!
One way to analyze your company is to compare yourself to your competitors. Look at other similar product offerings in your area and think about factors that differentiate them. How do you compare? While this may come back to a marketing standpoint, your marketing investments do ultimately affect your revenues. As well as competitors, keep up with industry trends and technologies. See what others around you are adopting, and consider where you can cost-effectively adopt new practices.
Compare your ratios over time, too. There are three main methods of financial analysis: horizontal, vertical, and ratio.
Investopedia describes this as comparing “data horizontally, by analyzing values of line items across two or more years.” (Investopedia). While this definition suggests looking at analyses over years, you can also do a horizontal analysis comparing your finances month to month. Take your income statement, balance sheet, and cash flow statement and examine your financial performance over time. What do you notice? Are there any minor or major fluctuations? Take note of these and make a plan to adjust!
Vertical Analysis looks at items as a whole across your business. Take note of major fluctuations in variable costs and note where you may be able to cut costs in the future. This is a great snapshot to see your company as a whole.
There are basic ratios you can compute to measure your profitability as a company. These include ratios like asset turnover, quick ratio, debt to equity, gross and net profit margins, and more. Think of this as the next step in your analysis where you begin to make sense of the numbers and reach conclusions about where you financially stand. Don’t be alarmed if you see shocking numbers the first time you compute! Adam Kae & Associates can help you calculate these ratios regularly and find ways to save you time and money.
Business is indeed a science, and it’s important to set up realistic experiments that could help you save hundreds or more. Test different marketing methods, operational changes, and cut costs where possible on small scales to see how they impact your company as a whole. Be cautious, and only make one small measurable change at a time to ensure a true experiment.
When forecasting, consider places to cut costs you may not have originally considered, such as office administration supplies. A paper-free company could save 10,000 pages a year according to an article by Middle Market Center. They note that while this saves your company money, it also shows your dedication to protecting the environment.
Overall, your financial analysis requires regular work and particular attention to detail. Adam Kae & Associates can provide solutions to your business finances and help you streamline your finances to save over time. Contact us today for a complimentary consultation to take command of your finances and maximize your growth!
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