Is your business on track to be successful? Is it going the direction you want it to go? At the end of the month when you review your financial statements, do you know if the results are good or bad? Are you only preparing financial statements for your tax accountant? You should be interested in creating financial statements for more than just to get your taxes done. Use your financial statements to help you can make proper decisions. Know if you are on track to keep your business successful. Here are five proven methods that accountants and small business owners use to analyze financial statements.
KEY PERFORMANCE INDICATORS (kpi)
KPI’s are ratio’s that are used to determine various aspects of your business. They combine components of your financial statements to tell you if your business is successful. KPI’s are used by themselves or by comparing to prior years or to other businesses in your industry. The KPI categories are Liquidity, Solvency, Efficiency, Profitability, Financial Leverage and Coverage. Key Performance Indicators are very useful tools.
Prepare an annual budget to enable you to make financial decisions during the year. Budgets are a very useful tool in measuring the success of your business. They are not meant to be static or set in stone. Truly useful budgets are fluid. If your business model changes, update the budget. Monthly, compare your financial statement results against this budget to determine if your business is on track to be successful.
MONTH TO MONTH COMPARISON:
Month to month comparison of your income statement can be very useful. Report your income statement on a rolling twelve month basis. Compare how the various categories or business segments are performing. Categorization errors will be visible. Is there a month that is missing rent expense? Why? Perform further analysis and find out. There may also be a business segment is doing well for the year but had a down month. Is it cyclical or was there a problem that month. Drill down on the data and find out the answers.
PREVIOUS YEAR COMPARISON:
Comparing your financial results on a year over year basis will help you keep your business successful. Is this year better than last year or worse? Has an expense category gone wild and needs to be corrected? You now have your financial results in a format to analyze and make course corrections.
FIVE YEAR PLAN:
Successful businesses make long term plans. Five year plans are very useful to help your business be successful. Your budgeting process, and the financial statement analysis should be measured against the five year plan to make sure you are on track. Do you need to make changes in your approach to get back on the expected path? A comparison of the financial data will help you in this decision process.
I would suggest you do further research on these five proven methods of financial analysis and use them. You may also ask your accountant to help you with this analysis.