For a business to grow and thrive, it must have healthy cash flow. A financial analysis can help your business understand where it stands financially.
What is a business financial analysis? A financial analysis occurs when a company evaluates its budgets, projects and other transactions to gauge its performance and profitability.
Performing an analysis is a multi-step process. Here’s how it works.
Compare Your Forecast to Your Actuals Monthly
For an accurate financial analysis, a good first step is to compare your forecasts to your actuals. Is your actual performance matching your forecast?
A cash flow tool can handle the number crunching for you to save you time.
Identify Where You’re Off Track or Exceeding Projections
Why is financial analysis important for business strategy? Because it helps you understand where you’re off track and where your business is excelling.
Forecasting tools help you make an educated guess on where your business is headed financially. But your actual performance may tell a different story. You may be:
- On the right track and close to your forecasts (a great thing!)
- Completely off track and falling behind
- Outperforming your forecasts
The last scenario is ideal, but even if you’re on the wrong track, your financial analysis can help you get back on course.
Now that you have your actuals and forecasts in hand, you can see where you’re doing really well and where you’re off track. You may find that you’re entirely off and will need to rethink your strategies.
Comparing your actual results to your plan or forecasts helps you gauge the overall performance of your business and if it’s headed in the direction you want. You’ll also see whether it’s a good time to carry out those expansion plans or cut back on expenses to get back on the right path.
Review Your Income Statement
When performing financial analysis for small businesses, you should review your income statement after comparing your actuals and forecasts. Your income statement looks at your income and expenses to see if you’re staying on budget or if you need to rein in expenses.
Your income statement should outline your:
- Gross margin
- Direct costs
- Operating income
- Operating expenses
- Depreciation and amortization
- Net profit
Reviewing your income statement will really help you get a grasp of where your money is coming from and where you’re spending.
You’ve already compared your actuals versus your forecast, and this data can help you pinpoint areas where you need to make corrections to be in line with your forecast.
Using your statement, you can:
- Determine which products or services have the highest profit margins and generate the most revenue.
- Determine which products or services aren’t generating enough revenue to make them worthwhile.
- Better manage your expenses and find areas to cut back to improve efficiency.
- Plan for large purchases.
- Understand when your slow periods are and account for them.
Your income statement will play an important role in your financial analysis, so make sure that you review it thoroughly.
Analyze Your Cash Flow Statement
An accounting cash flow analysis will help you understand how much cash is moved into and out of your business. Here’s another great opportunity to compare your actual cash flow statement with your cash flow forecast to see where you’re at.
If your statement and forecast are not aligned, then you can take steps to improve your cash inflows or reduce your cash outflows.
Review Your Balance Sheet
Your balance sheet will help you see the big picture when it comes to your business’s financial health. Here is where you can view how much money you are owed and how much money your business owes.
You can use your balance sheet to determine whether you’re taking on too much debt or charging customers the wrong rates. It’s an excellent tool for understanding where you’re at and where you need to go with your business.
A financial analysis will help you gauge the financial health of your business and ensure that you’re on the right track to reach your goals.
Then, using all of the information in your review, you can implement changes to push your business back in the right direction and ensure that your performance is aligned with your forecasts and projections.
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