A financial statement looks straightforward to read, right?
Wrong!
For most Owners and Executives, they’re familiar with the financial statements form their businesses and companies, but…
They overlook a number of important pieces of vital information that could make their operations more money.
This is why it’s so important to effectively analyze and understand a financial statement beyond “money in, money out.”
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As your Outsourced Accounting Department, I’m going to share the six steps to effectively analyze your financial statements, so you can make better decisions for your operation.
6 Steps to an Effective Financial Statement Analysis
There are three key areas on a financial statement that you want to understand:
- The structure of the financial statements
- The economic characteristics of the industry in which the firm operates and
- The strategies the firm pursues to differentiate itself from its competitors.
Within these three key areas, you’ll find a plethora of information that you can leverage to make better, more informed decisions for the future success of your operation.
Here are the 6 steps to analyze your financial statements:
#1. Identify the Economic Value Chain
Determine the industry economic value chain between creation, manufacturing, distribution, and more. This tells you what it costs to generate your operation’s products, services, or otherwise. It also shows you how much you make because of this value chain.
Typically, you can use what’s called the Porter’s Five Forces to analyze this and get the information you need.
#2. Identify Company Strategies
Look at the nature of the service/product being offered. Is it unique? What are the profit margins? Do you control creation and/or brand loyalty? Other factors that matter here: supply chain integration, geographic diversification, and industry diversification.
This looks at how you’re manufacturing, fulfilling, and delivering to your customers.
#3. Assess Quality of Financial Statements
Not all financial statements are created equal. It’s important you assess the quality of your financial statements within the context of relevant accounting standards. Examine balance sheet accounts, recognition, valuation, classification, and more. Answer the question:
Does this balance sheet represent the company’s economic position?
Answering this question will qualify the report OR it will put you on the path toward WHY you need to dig deeper into the data.
#4. Analyze Profitability and Risk
The upside to taking risk is more money. This is the game Owners, Executives, and Entrepreneurs play every single day. That’s why it’s important to understand how a financial statement shows you liquidity, asset management, profitability, debt management/coverage and risk/market valuation, and more. The ratios between these will give you a high-level view of the revenue and risk your operation provides.
Determine how profitable your operation is compared to it’s risks and liabilities.
#5. Prepare Forecasted Financial Statements
The next step in leveraging financial statements to grow and scale is projection. Put your operation on a determined path to success within a financial statement. Take the historical patterns and project them into the future. Do you see growth or collapse? What’s the outcome at 12 months, five years, 25 years, and beyond? This forecasted look at your company will give you some insight into what you need to do now to turn tomorrow into a success story.
Use reasonable assumptions on projections from financial statements so you can understand exactly where your financials will stand in months to years from now.
Ready to get spot-on, accurate reports–weekly, monthly, quarterly, or whenever you want and have an Expert explain them to you?
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