Conducting a proper financial analysis can be beneficial to all business owners no matter the size of the company. This can help determine a company’s performance, growth, and sustainability by reviewing a variety of the its financial reports.
What is a Financial Analysis?
Financial analysis is an assessment performed by professionals who prepare reports using calculations and ratios. Using a company’s past financial statements and reports can help determine the performance and profitability of that business.
Components of a Financial Analysis
1. Income Statement
An income statement showcases a company’s financial performance over a given time period. It can help predict future performance and calculate current profitability.
When conducting a financial analysis, a company’s revenue is important to review to determine quantity, quality, and timing for long-term success. There are two types of revenue ratios:
- Revenue Growth: The percentage of a business’s growth during a given period.
- Revenue per Employee: Helps measure your business’ productivity and how many employees your company needs.
Profit is a financial gain, from the amount earned and amount spent on production. Reviewing how profitable your business has been in the past is an indicator of whether your business will survive in the future. Three important profit margins to conduct in your financial analysis include:
- Gross Profit Margin: The percentage of revenue remaining after deducting your cost of goods sold.
- Net Profit Margin: What remains after all expenses have been deducted from sales and how much profit a business can make from its sales.
- Operating Profit Margin: Determines your company’s ability to make profit. Operation expenses don’t include taxes or interest.
4. Operational Efficiency
Measures how well your company uses its resources. A lack of efficient use of a company’s resources can be the cause of smaller growth and financial profits.
- Inventory turnover: The ratio used to measure how efficiently your business manages its inventory.
- Accounts Receivables Turnover: Measures how efficiently your business manages the credit extended to your customers.
Financial analysis can be confusing at first, but understanding how it works can be beneficial for your business performance. If you're seeking financial help, the experts at Satty, Levine & Ciacco, CPAs, P.C. can assist you. Visit our website today to view our services.