There are several aspects of launching a small business that might appear difficult. For most entrepreneurs out there, one of the major challenges lies in expanding the business with constant sales. The overall path to ensuring stability, improved efficiency, and increased profits will revolve around in-depth financial analysis of the respective operations. In this aspect, feature-rich financial statement analysis tools can help significantly.
When you conduct in-depth financial analysis of your operations, it will guide your overall business growth. At the same time, it will also require focus on various other crucial components of financial analysis for an SME. These core elements help in empowering your SME to develop a detailed picture of the entire financial health of your small business. You can take professional help from the industry experts to execute financial statement analysis for your small business.
What are the Core Financial Analysis Elements?
While you can analyze financial reports of different types to gauge the overall performance of your business, some of the core elements to consider in comprehensive financial statement analysis are:
- Income Statement
Analysis of the income statement of your small business will reveal how your business has been successful in performing over a specific period of time -like 3-12 months. Income statement analysis is done by subtracting all the subsequent expenses of the business from the respective earnings over the given timeframe.
Until the money generated out of sales tends to overrule the amount spent in expenses, your business will continue being profitable. Income statements are also known P&L or Profit & Loss statements.
- Balance Sheet
It is also referred to as the statement of financial position. Analysis of the company’s balance sheet helps in offering a complete picture of:
- The overall ownership of the small business -including assets like equipment, cash, inventory, investments, accounts receivables, and prepaid expenses.
- The amount owed by your small business -including liabilities like debt, accounts payable, merchant cash advances, equity shares, wages payable, and interest payable.
In most cases, the balance sheets of small businesses are segmented with assets and equities or liabilities.
- Cash Flow Statements
The analysis of the cash flow statements highlights the amount of cash generated by your business from activities -including selling merchandize. However, it can also include money that is generated out of other streams of income -like bank loans, dividends out of side investments linked to your business, and investor financing.
The ultimate objective of the cash flow statement is determining how solvent your business is at the given moment. It can also be utilized towards forecasting your overall ability to meet short-term expenses or garner sudden shocks like the global pandemic.
Financial Analysis for Small Businesses – Important Factors to Know
As you go through relevant data obtained out of the core elements of comprehensive financial statement analysis, you are able to derive meaningful insights into how your SME is performing throughout. Some additional aspects that are crucial to financial statement analysis of small businesses are:
It is the amount you have after you have subtracted all your expenses. Some entrepreneurs out there tend to focus on the concept of profit margin.
Profit Margin = (Sale price -cost to manufacture) / Sales price X 100
The concept of net profit margin offers a comprehensive overview of the overall financial health of the business. It is because it will factor in all your individual costs.
- Operational Efficiency
The equation of operational efficiency helps in measuring how efficiently you are leveraging the existing resources to generate maximum sales. More particularly, the principle of operational efficiency helps in calculating how much profit your business is able to garner depending on what it will cost to run your business.
The concept is calculated by dividing the existing operational expenses by total revenues. Operating expenses can typically include aspects like marketing, inventory costs, insurance, payroll, and so more.
Most SME owners tend to overlook the concept of operational efficiency as they prefer focusing on advertising and marketing to increase profits. However, when you are able to maintain the ongoing sales with minimal costs, it also helps in boosting profits. An activity as simple as switching to a highly economical supplier or investing in some time-saving technology can help in minimizing the expenses -thereby, improving operational efficiency.
- Revenue Growth
Revenue refers to all incoming cash and sales. A number of small business owners tend to calculate revenue growth by using the formula as:
Revenue Growth = (revenue of the current period -revenue of the previous period) / revenue of the previous period X 100
Ultimately, the goal of revenue growth reports is to improve the factor over time.
- Capital Efficiency
It is regarded as the ratio of how much you wish to spend on towards improving revenues and how much you will obtain in return.
- Liquidity and Solvency
Solvency is a crucial measure of ensuring the overall financial health of the organization. It also helps in determining whether or not the cash flow of the small business is sufficient to grow the respective small business -towards handling long-term obligations.
While most entrepreneurs think of taking up a loan to improve the conditions of the small business, still investors and lenders would like to possess knowledge about your debts.
What are the Best Practices for Financial Statement Analysis?
When you are a small business owner, it can be confusing and overwhelming as far as financial analysis is concerned. However, regular & in-depth financial statement analysis of your company can help your SME in running more profitably and efficiently. The more detailed financial analysis you conduct, the more success you can achieve in the future.
Wish to upscale your small business with respect to its finances? At Perfios, the innovative FSA or Financial Statement Analyzer serves to be a one-stop financial statement analysis tool for automating the collection, curation, and analysis of financial statements, but also generating the financial statement analysis tool.
Also read: Importance of financial statement analysis for SME