Better decisions are based on better information. Analyzing, understanding, and using reliable and timely accounting reports in the decision making process will improve the business. Decisions need to be made about pricing, purchases, borrowing, expanding, selling, negotiations, hiring, and much more.
For most business owners and managers, regardless of wealth, financial analysis is of top importance for decision making. Accounting reports are the key to this analysis.
The Balance Sheet gives a snapshot of the present position of the business by showing what is owned in the way of assets, what is owed in liabilities, the owner’s investment in the business, retained earnings, and current period profits or losses. Year-end Balance Sheets are often compared to previous years to analyze trends. Current assets should well exceed current liabilities or bills might not get paid on time. Bankers will be interested in coverage ratios and equity.
The Income Statement, sometimes referred to as the Profit & Loss Statement, looks at the past revenue and expenses. The difference is often stated as a profit or loss. The past period might be a month, a quarter, or a year. Reports can be prepared to compare the current period to a previous one. Analyzing changes, trends, and problems will improve decision making. For example, if the cost of rent is going up, will prices have to be raised or can other costs be reduced? Break-even analysis will examine how much has to be sold at what prices in order to pay all expenses.
An analysis can be made of how the business compares to others in the industry using ratios. What are similar sized businesses spending on rent or materials as a percentage of sales?
Cash Flow Projections help to predict the future of an extremely important asset, cash in the bank. Cash Flow Management is so important, it has a separate page.
Financial Analysis can become a complicated topic and the purpose here is not to teach accounting. Most small businesses hire accounting professionals to prepare taxes and provide advice. Certified Public Accountants have the education and credentials needed by many small businesses.
Idaho Small Business Development Centers offer workshops to help small business owners improve financial analysis skills and offer consulting to help analyze the feasibility of a business plan.
