Ideally, small businesses should analyze their finances on a weekly basis. There is a close relationship between how business leaders monitor and understand their company’s financial health and which companies are successful and growing. A Federal Reserve study found that 78% and 92% of companies with above average and excellent financial health, respectively, had annual revenues of more than $1 million. In contrast, 40% of companies with poor financial health had revenues of less than $100,000.
Additionally, the study found that 90% of companies with good financial health always budget and have a separate bank account for payroll, compared to only 5% of companies with poor financial health.
What do you need for financial analysis? To conduct a financial analysis, a business needs all of its historical data. Track all income, payments, deposits, invoices, and business expenses, as you will need this information to create financial reports. The most important financial reports include the income statement, balance sheet, cash flow statement, accounts receivable, accounts payable, and inventory report.
Carefully review the numbers in these reports to identify anything that doesn’t make sense or is unusual compared to the previous week/month. This could indicate a problem or reveal changes the business should make to save costs or drive revenue growth. This information helps evaluate two aspects of a company’s financial health: profit margins and capital utilization, and is the basis for many other detailed indicators.
Why do you need to do a financial analysis? According to a Federal Reserve study, financially healthy small businesses have four things in common: they have in-depth knowledge and experience with various types of loans, maintain larger unused loan balances, budget more regularly, and save cash, especially for payroll. .
The study showed that “there is a direct correlation between financial management and the financial health of small businesses.” The ability to understand financial reports and make decisions based on numbers can make a big difference in a company’s survival and growth. Elements and indicators that should be tracked in the analysis include profitability, cash flow cycle, working capital requirements, available cash/near-cash funds, credit to fund operations/expansion, and personal creditworthiness.
Having accurate financial reports as a basis is the first step in sound financial analysis. Each report contains information that can be used to analyze the financial health of a company. The four reports that every business needs are the income statement, balance sheet, cash flow statement, and retained earnings statement.