Financial Statement Analysis: Learn About What Shape Your Business Is In

When it comes to running your business, one of the best ways to learn about what kind of shape it’s in than conducting a financial statement analysis.

Not only will analyzing a financial statement show you where your company has stood financially but it will also show you where it is standing now. Analyzing your company’s financial statements can also help you make plans for the future that will allow you reach the goals you’ve set up for your company.

That’s why you don’t want to make the same mistake that I often see with many other entrepreneurs.

Too many times I’ve seen business owners take a look at their financial situations and, if they were satisfied with that they saw, that was the end of it.

That’s a mindset that I believe every business owner needs to get away from if they want to thrive.

Complacency will only hurt your business in the long run. No matter what stage your company is in, you should always be in the same frame of mind you were in when you started. Always look for the next big thing, always look for ways to improve what you do and continuously try to make your situation better.

This post will show you just how you can do that by starting with your financial statement analysis.

So let’s get started.

Parts of a Financial Statement

In order to get a grasp of where your company stands and what you can do to make things better, you first have to look at just what a financial statement is and what it consists of.

In simplest terms, a financial statement is a series of documents that report on various aspects of your business, as well as your company’s overall financial status.

These different reports all come together to give you a comprehensive view of where your resources were spent, what you have coming in, and what goes out.

The parts that make up your financial statement include:

  • The Income Statement – You may sometimes hear this referred to as a “Profit & Loss” statement but it means the same thing under either name.

This part of your financial statement keeps track of how well your company sells its products and/or services. It also takes into account the expenses that your company regularly incurs

Things like your equipment, payroll, and other regular expenses that come as a part of running your business are also included as part of your financial statement analysis. These work in conjunction with the income you bring in to form your net profit, the amount that you walk away with after all necessary expenses have been addressed.

  • The Balance Sheet – This is also referred to as the “statement of financial position” at times.

This report represents your company’s financial position at a given point in time by keeping track of your company’s assets and liabilities.

Assets are things that are valuable to your company and can include cash, patents, inventory, equipment, stocks, bonds, land, equipment, and anything else that holds value for your company.

Liabilities, on the other hand, are things that your company owes to others. This includes payroll, bills, money owed to investors and other costs that are normally associated with running a business.

These numbers figure into your financial statement analysis by letting you know what your money goes toward every month and may give you some insight as to where you can reasonably cut costs.

  • The Cash Flow Statement – This is a report of your company’s cash related activities and it fits into your company’s financial statement analysis by showing you what kind of cash is coming comes in and what kind of cash is leaving.

With a cash flow statement, you keep tabs on areas like operations, investments, and financing.  This will give you strong insight into the health of your business because the cash flow can be compared to your net income to gauge the overall quality of its earnings.

By showing that your company has high quality earnings, you can prove to investors that your business is something worthy of their investment dollars.

  • The Statement of Changes in Equity – Last, but not least, we have a part of your financial statement analysis that gives you an overview of the activity in equity accounts for a given period of time 

This information is important because it lets you know what your stake in the company is over a period of time. Any changes in equity that occur over time, whether they’re gains or losses, are tracked through this statement and used to measure where you stand in relation to the history of your company’s growth and development over a given period of time.

 

During the lifetime of your company, you want to maintain the ability to guide the business towards the goals that you’ve established. However, you can only do that by staying informed about the circumstances surrounding your finances.

The purpose of a financial statement analysis is to let you know exactly what’s going on year after year so that you can make the sound decisions your company needs in order for it to continue down the right path. When you have an analysis placed in front of you, make sure to give it a good look several times over.

Even if things are going well, you can always improve on your situation and turn your company into the kind of business that people everywhere take notice of and return to time and time again.

Remember, running a business successfully does not need to be complicated.  Keep it simple!

For more information on business analysis, business planning, and ways to grow your small business profitably, please check out our website www.portalcfo.com.  Follow us on Twitter @portalcfo

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