FINANCIAL STATEMENT ANALYSIS
Determine the financial health of your organization by analyzing your statements at regular intervals throughout the year.
financial statement analysis
You’ve worked with Savvy & Suite’s dedicated team to rescue your books from the brink of disaster. Now what? Your information is there to be analyzed, of course! This can seem daunting at the outset, but our team will work with you to get you on track regarding financial statement analysis. We’re here to teach you the basics, allowing you to gain insight into your business performance in ways that can only be gathered through such analysis.
What is financial statement analysis? This in-depth analysis digs deeper into your numbers by using tried and true financial ratios to give you more information about your business performance than is immediately evident on the face of your balance sheet or income statement. A detailed financial statement analysis of a company can potentially highlight strong performance indicators or shine lights on where the business may not be as competent as expected based on preliminary data. This is more than just looking at Accounts Receivable or Revenue accounts. This is trying to understand why things happen the way they do using metrics that have been used as benchmarks in business for years.
This is really an area where the sky is the limit, but there are some basic financial statement ratios that may be helpful when performing an analysis. Before the ratios, however, it’s important to note that it’s helpful to benchmark your company against ratios of your direct competitors in your area, if possible. It may not make sense to compare the liquidity ratio of your small, mom-and-pop shop to a publicly traded behemoth.
As mentioned, there are various methods of financial statement analysis, but comparing benchmark ratios is a good way to get a gauge on underlying performance. Some of the most common performance ratios include liquidity, leverage, and profitability ratios.
Liquidity ratios in financial statement analysis help determine how much liquidity (i.e. “spendable” assets) you have. This is helpful in determining how able you are to pay the bills, in simplest terms. The current ratio, which compares current assets to current liabilities, is a prime example of this idea. Strong liquidity ratios imply your business is performing well, especially as it relates to day-to-day. Some other liquidity ratios that measure key indicators include the acid test ratio (liabilities compared to assets that are easily converted to cash) and cash ratio (comparing cash and cash equivalents to current liabilities).
Leverage ratios, on the other hand, help determine how much of your company’s assets are derived from debt. Once again, the most basic example of this is the debt ratio, which compares total liabilities to total assets. Leverage ratios can offer helpful insights into what constitutes your balance sheet and whether you are overleveraged or not. This can also help determine if more debt could be a useful thing, and whether or not you are in a good position to take on additional debt. By using these performance ratios instead of just feelings, you can cut through emotion in order to make informed business decisions that could have a lasting impact on your business.
Profitability ratios are most likely the best known of the three. These ratios are helpful in determining various aspects of the business, from operating margin to return on assets. These ratios help complete the full picture that an income statement alone doesn’t provide. For instance, it’s important to note how well a business is using their assets to make a profit, which is diagnosed by the return on assets profitability ratio. Comparing this ROA ratio to other benchmarks can help determine if your business is using your assets efficiently or if special attention needs to be paid to this area.
This area also plays a major role in external reporting, as stakeholders often use financial statement analysis ratios to determine the profitability and overall health of the organization. This is especially true in publicly traded companies, as the behemoths in the industry are constantly judged by various ratios and metrics that seemingly impact stock price by the day. Although this may not impact your company, it is important to understand that the metrics can and should be used by all applicable stakeholders. Financial statement analysis also works well if you are a stakeholder yourself that are not involved in the day-to-day operations of the company; this process allows you to get under the hood and really investigate your business, helping to determine ownership strategies.
All this sounds intense, but Savvy & Suite is once again here to connect the dots. We have developed a wide variety of financial statement analysis templates, from simple Excel files to more robust studies. At the end of our time working through your financial statements, we can present a financial statement analysis report that highlights the strong points of your business and also points out areas for improvement. We have vast industry experience and can rely on this experience to determine if your chosen benchmarks are right for your company size or industry; as noted, we want to be sure that we’re comparing benchmarks from companies that are similar to yours in order to give you the best outlook on your performance measures.
This is all very company-specific, however. What works for some may not work for you, and that’s okay. That’s why we not only serve in an analysis capacity, but also in an advisor capacity. We’re here to help talk through which performance ratios may be more enlightening to your business than others. We’d love to create a financial statement analysis “cheat sheet” that applies directly to your business, taking into consideration your goals for the analysis. Whether you’re an external stakeholder or someone involved in the daily operations, we’d be happy to help you reach your business goals through the use of innovative financial statement analysis.