As a business owner, running a business is never an easy feat, especially if you’re going to deal with the financial aspects.
However, having great financial health is essential to determine your business’s potential for long-term growth. This is one reason why you should be analysing your business finances to avoid financial woes and ensure a financially stable future.
Typically, financial analysis refers to a process of studying and assessing the viability, profitability, and stability of a business. While it can be a complex and time consuming undertaking, it plays a vital role in keeping the company financially afloat and competitive.
If you’re planning to analyse your business finances, below are the four factors to consider from the get-go:
When conducting a financial analysis for your business, one of the important things that should be taken into account is the revenues. Generally, the revenues are considered as the company’s primary source of cash, which is why these play an essential part in analysing the financial health of your organization.
For example, if your company has a steady flow of revenue, the amount of cash available will be higher than the amount needed to cover all expenses. This can be a good indicator that your business is profitable and growing.
However, for the purpose of making an accurate analysis, considering revenues means taking the following elements into consideration:
- Revenue growth – Calculating the revenue growth can help determine whether your business finances stand. This can also help you figure out whether there’s an increase in the total revenues generated within a certain period of time.
- Revenue concentration – It’s also crucial to take a look at your business’s revenue concentration when studying your finances. For instance, when a single customer is responsible for the high percentage of your revenues, then, you may deal with financial difficulties in the event they stop doing business with you. This is one reason why you should include this element in your financial analysis.
- Revenue per employee – When computing the revenue ratio per employee, you also measure your company’s productivity. In most cases, having a higher ratio means your business is generating good amounts of revenue per employee.
As you can see, dealing with your company’s revenue when analysing finances can be a complicated feat. Unless you’re a professional, you may need the assistance of chartered accountants Nottingham, or from wherever you live, to help you with the process.
Another factor to keep in mind when analysing business finances is the profits. The difference between profits and revenues is that the former refers to the amount of income after accounting all the expenses, debts, operational costs, and many more, whereas the latter refers to the amount of income generated from the sales of goods or services as part of your business operations.
That’s why in addition to revenues, it’s also essential to consider your company’s profits when conducting a financial analysis. Realistically speaking, being unable to produce good amounts of profits means your business may not be able to thrive in the long run. So, to make sure you get an accurate analysis of your company’s finances, be sure to include relevant data on your gross profit margin, operating profit margin, and net profit margin.
3. Operational efficiency
When assessing your business finances, it’s also important to pay attention to your company’s operational efficiency or how well you’re utilizing the resources. In most cases, dealing with a lack of operational efficiency means your organization is generating smaller profits and experiencing weaker growth.
To know how efficient your business operations is, below are the components to consider:
- Inventory turnover – This can show how your company manages the inventory. For example, if you have a high inventory turnover, it means your business is producing more sales.
- Accounts receivables turnover – This can show how you can efficiently manage the credit you’re extending to the customers. When the numbers are higher, it means your business is doing good in terms of payment collections.
When analyzing your current business finances and other related matters, it’s also crucial to factor in the liquidity of your company. Your business is considered liquid when it has the ability to generate adequate cash to cover some cash expenses. But, if your company has poor liquidity, no amount of profit or revenue growth can compensate this financial problem.
That said, you should determine how liquid your business is to have a clear picture of its financial health. You can do this by considering your ability to pay interest expense from the cash you generated and your ability to pay off short-term obligations from cash and other assets.
Ideally, performing a financial analysis doesn’t need to be difficult if you know how to keep the factors mentioned above in mind. Remember, knowing where your business stands within the purview of financial health is important for its growth and survival.