Business

The importance of business financial analysis and management

Planning and control are the two most important ingredients for a successful business. A business plan takes most of the guesswork out of business strategy and control through sound financial analysis. Financial data provides a way to measure where you are in your Strategic Plan, telling you where changes to your Plan are needed. Because of this, analyzing and managing financial data is of vital importance to running a successful business.

It is extremely important to have a proper Accounting System installed throughout your company so that data acquisition is easy. You cannot manage your Business for Profitability without a good Accounting System. My CPA has a bookkeeper who comes into the business to help set up the Accounting System and show us how to get it working. All of this is done with the guidance of the CPA but at a fraction of the cost. A good bookkeeper is invaluable in helping to capture financial data. Having a working Accounting System in place will minimize the fees a CPA charges to analyze your tax liability and prepare your tax returns.

An accounting system is typically built around the following key financial management tools:

– Income Statement (Profit and Loss Statement)

– Cash flow statement

– Balance sheet

– budget

– Break-even point analysis

By having a financial management system in place, you can easily spot early warning signs or spot particularly profitable areas. Not having a system to analyze and organize financial data makes it impossible to effectively manage, grow and control a business. It makes it impossible to measure the success (or lack thereof) of your Planning and Strategy. Furthermore, if used incorrectly, inaccurate financial data can be disastrous for the livelihood of a business.

An Accounting and Financial Management System is only as useful as it is used systematically throughout the company. It is extremely important to implement the system in the very structure of the business and to use it systematically. The Accounting System is a reflection of the health, or lack of it, of a company and from which business decisions are made. Make sure you set it up correctly, train your people, and most importantly, use it!

Two main objectives of any business are to be Profitable and to have Cash Flow to pay the obligations. The Income Statement and Cash Flow Statement feature prominently in this area. The income statement represents how well a business is operating, and the cash flow statement shows how well a business is managing its cash. Profit or Loss on the one hand and Liquidity on the other.

The trick is to find a good balance between Benefits and Liquidity, which when not planned well, can be very difficult to maintain. Rapid growth with high profits can deplete a business of liquidity, so being profitable is no guarantee that you will stay in business. The function of the existing and projected income and cash flow statement is to help you identify problem areas so you can plan for them effectively, such as raising more capital, infusing more capital, or obtaining financing. Additionally, these two statements help you identify areas that can be better controlled and managed, avoiding the need for additional capital and financing.

The Break-Even Analysis is based on the Cash Flow and the Profit and Loss Statement. The Break-Even Statement and Chart are extremely important because they show how much sales revenue is required to accurately balance the sum of your fixed and variable expenses. Break-even analysis can be extremely useful when:

– Establishment of price levels for products and services

– Decide whether to buy or lease equipment/building

– Determine profit projections based on various levels of sales.

– Determine if new employees are required.

– Advance planning of finances / capital required in the future

– Make the Strategic Objectives more tangible and achievable

– Measure your company’s progress towards profit goals

The Balance Sheet records the past effects of company decisions (or lack thereof) and projects the effect of future Plans. The Balance Sheet is a record of the company’s Liquidity and Net Worth. These variables are directly affected by the Income and Cash Flow statements. The balance sheet is the financial one that is often overlooked, but very useful:

– Shows the effect of past decisions.

– Track a company’s cash liquidity position

– Records the level of owner’s capital

– Quickly show the status of the business

A budget analysis compares a company’s actual performance to projected performance on a monthly, quarterly, and yearly basis. The Budget is a great tool to guard against excessive and unmitigated expenses and is closely linked to the Strategic Objectives that the company has set. Analyzing income statement and cash flow statement projections against actual performance is an excellent monitoring tool that can quickly address issues before they become too serious. Small oversights and errors in the Projections of a Company over time can have a disastrous effect. Budget analysis is your protection against that.

Working together, the income statement, cash flow statement, balance sheet, break-even analysis, and budget analysis provide a complete picture of a company’s current operations, liquidity, past operations, and future viability. a company. Working through an interactive Accounting System can be a very useful tool to determine future business scenarios and analyze past mistakes. Understanding the financial implications of your financial decisions can mean the difference between success and failure for your business. Probably the most important financial information is your cash flow statement, but understanding all of these financials and how they work together is the key to business success. Projections are based on assumptions; make sure they are well thought out and as realistic as possible.

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