Wellington Accountants: Run a financial analysis for your business
If you were asked about your company’s financial strengths and weaknesses, would you be able to provide a detailed response? Conducting a financial analysis allows you to understand your business’s financial performance and make informed decisions regarding growth and investments.
What is Financial Analysis?
Financial analysis involves examining a company’s financial data to assess its performance and make strategic business decisions. Founders, executives, investors, and potential lenders utilize financial analysis to evaluate a company’s financial health and determine investment potential.
Financial analysis is typically conducted by external finance professionals who review documents such as income statements, cash flow statements, and balance sheets.
How to Perform a Financial Analysis:
1. Gather your company’s financial statements:
To gain meaningful insights, compare your business’s performance over time. Collect recent balance sheets, income statements, and cash flow statements spanning three to five years, focusing on the most recent and relevant data.
2. Analyze balance sheets:
Balance sheets provide a snapshot of your company’s financial status at a specific point in time, showcasing assets, debts, and owner’s equity. Evaluate your balance sheets to understand factors such as debt-to-equity ratio, debt trends, liquidity, and changes over time.
3. Analyze income statements:
Also known as profit and loss (P&L) statements, income statements reveal revenue, expenses, and profits. Evaluate gross revenue, operating income, and net profit to identify trends. Startups may have a net loss but still generate operating profit due to initial loan repayments.
4. Analyze cash flow statements:
Cash flow statements reveal how money flows in and out of your business, identifying income-generating activities and expenses. Review cash flow from operating, investing, and financing activities, comparing trends and total cash flow changes over time.
5. Calculate financial ratios:
Use financial ratios to gain deeper insights into profitability, liquidity, and operational efficiency. Common ratios include debt-to-equity, current ratio, gross margin, and return on investment.
6. Summarize your findings:
Consolidate your analysis, highlighting your company’s financial strengths and weaknesses, performance compared to projections, potential explanations, and areas for improvement. This analysis equips you for informed discussions with stakeholders and investors.
Types of Financial Analysis:
Various types of financial analysis can be employed based on your objectives:
– Horizontal analysis:
Compares financial statements over different periods to identify growth trends and support forecasting.
– Vertical analysis:
Evaluates financial performance relative to a single metric, such as total assets, providing insights and facilitating benchmarking.
– Valuation:
Utilizes financial information to estimate a company’s value, important for investors and fundraising.
– Growth Rates:
Analyzes percent changes in specific metrics over time to forecast future performance.
– Profitability:
Utilizes ratios to assess how efficiently a company generates profits, influencing reinvestment and shareholder distributions.
Remember, the goal of financial analysis is to consider the complete picture and make informed investment decisions. Understanding your company’s financial performance empowers you to make strategic decisions and present your business effectively to potential investors.
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