The Importance of Business Financial Analysis and Management
Planning and Control are the two most important ingredients to a Successful Business. A Business Plan takes most of the guess work out of Business Strategy and Control through solid Financial analysis. Financial Data provides a way to gauge where you are in your Strategic Plan, telling you where changes in your Plan are necessary. Because of this, Financial Data Analysis and Management are vitally important to running a successful business.
It is extremely important to have a suitable Accounting System installed throughout your business so data acquisition is easy. You cannot manage your Business for Profitability without a good Accounting System. My CPA has a bookkeeper who comes out to the business to help install the Accounting System and show us how to work it. 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 capture Financial Data. Having an established 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 & Loss Statement)
– Cash Flow Statement
– Balance Sheet
– Breakeven Analysis
By having a Financial Management system in place, you can easily identify early warning signs or spot particularly profitable areas. Not having a system in place to analyze and organize Financial Data makes it impossible to effectively manage, grow and control a business. It makes it impossible to gauge the success (or lack there-of) of your Planning and Strategy. Moreover, used incorrectly, inaccurate Financial Data can be disastrous for a company’s livelihood.
An Accounting and Financial Management System is only as useful as it is used systematically throughout an entire business. It is extremely important to implement the system into the very fabric of the business and be used systematically. The Accounting System is a reflection of the health, or lack thereof, of a business and from which business decisions are made. Make sure to set it up right, train your people on it and most importantly, use it!
Two principal objectives of any business are to be Profitable and have Cash Flow to pay obligations. The Income Statement and Cash Flow Statement figure prominently in this area. The Income Statement represents how well a Company is operating, and the Cash Flow Statement shows how well a business is managing its Cash. Profit or Loss on one side and Liquidity on the other.
The trick is to find a good balance between Profits and Liquidity, which when not well planned for, can be very difficult to maintain. Fast Growth with high profits can drain the liquidity of a business, so being Profitable is no guarantee you’ll stay in business. The role of the existing and projected Cash Flow and Income Statement is to help you identify problems areas so you can effectively plan for them, such as raising more capital, infusing more equity or obtaining finance. Moreover these two statements help you identify areas which can be better controlled and managed, forestalling the need of additional capital and funding.
The Breakeven Analysis is based on the Cash Flow and Profit & Loss Statement. The Breakeven Statement and Chart is extremely important because it shows the revenue volume from sales that are required to precisely balance the sum of your fixed and variable expenses. The Breakeven Analysis can be extremely helpful when:
– Setting Product and Service Price Levels
– Deciding whether to purchase or lease equipment / building
– Figuring out profit projections based on various sales levels
– Determining if new employees are required
– Planning ahead for finance / capital required in the future
– Making Strategic Objectives more tangible and achievable
– Measuring your Company’s progress toward Profit goals
The Balance Sheet records the past effects of company decisions (or lack thereof) and projects the affect of future Plans. The Balance Sheet is a record of the company’s Liquidity and Owner’s Equity. These variables are directly affected by the Income and Cash Flow statements. The Balance Sheet is the often overlooked Financial but it has a lot of utility:
– Shows the effect of past decisions
– Keeps track of a Company Cash Liquidity Position
– Records the level of Owner’s Equity
– Quickly shows the condition of the business
A Budget Analysis compares a Company’s Actual Performance to Projected Performance on a monthly, quarterly and annual basis. The Budget is a great tool to guard against excessive, unmitigated expenses and is closely tied to the Strategic Objectives the company has set. Analyzing the Income Statement and Cash Flow Statement projections against Actual Performance is an excellent control tool, which can quickly address problems before they become too severe. Little oversights and mistakes in a Company’s Projections spread over time can have a disastrous affect. The Budget Analysis is your guard against that.
Working together, the Income Statement, Cash Flow Statement, Balance Sheet, Breakeven Analysis and Budget Analysis provide a complete picture of a company’s Current Operations, Liquidity, Past Operations and Future Viability. Working through an interactive Accounting System can be a very useful tool in determining future business scenarios and analyzing past mistakes. Understanding the financial implications of your Financial Decisions can mean the difference between your company’s success and failure. Probably the most important financial is your Cash Flow Statement but understanding all of these financials and how they work together is the key to a company’s success. Projections are based on assumptions – make sure these are well thought out and as realistic as possible.