Numbers are nothing more than ink on paper or digits on a screen, if you don’t know how to analyze and use them. You may have all the financial data you need, but a lack of understanding of how they can help your small business won’t yield results. Learning how to evaluate your financial data will improve your decision-making and strategies.
Here are some practices for financial statement analysis for small business owners.
Determine Company Strategy
The strategy of your company is one of the things you should consider when analyzing financial statements. Your big and small objectives guide your decision-making process. Should you invest in new office equipment to improve efficiency or hire new staff? Do you plan to add more branches in another city? Your goals allow you to determine where to invest that move your small business forward.
Review Quality of Financial Statements
When you evaluate your financial statements, it should take into account pertinent accounting models within your industry. Ask the question ‘does your balance sheet represent your company’s economic standing?’ The answer to this allows you to put your company’s financial situation in its proper context.
The income statement should provide you with an overview of your business’ performance. The statement of cash flows should enable you to understand, if your company is liquid or not. This allows you to identify where your money goes, possible processes that reduce costs, and opportunities for higher profit.
Create a Forecast
It helps to create forecasted financial statements. Make possible assumptions about your small business’ future. Then determine how your forecasts and projections may affect investments, cash flow, and resources. One of the financial practices you can implement is the percent of sales approach.
Evaluate Profitability and Risks
Determine the profitability of your small business within the context of your niche. If you are spending too much on marketing, office equipment, and others, you might want to consider changing your strategy.
Do your competitors reach their intended audience more efficiently than you? Do they spend less and maximize their resources? If so, identify ways to improve the efficiency of your processes. Consider outsourcing tasks such as bookkeeping, customer service, IT, and others to make your business efficient. Your financial statements provide you with data on how to make strategic changes.
Your financial statements have the data you need to reassess your company’s goals. The abovementioned ways allow you to analyze information and make sound decisions. If you need assistance, you can check out our small business accounting services. We at Robookkeeper can connect you with experienced virtual bookkeepers.
