Whether you are an emerging business owner or an established entrepreneur, there is no getting away from the fact that you are going to need to get your head around finances. The term financial analysis can leave even the savviest manager in a spin, so we have broken it down into five simple sections to help you get to grips with understanding the difference between your gross and net figures.
Why do we need financial analysis?
The most common reason for using financial analysis is when a business owner needs to obtain credit or is looking to secure an investor in their business. A financial analysis allows a business owner to evaluate their business to determine its investment potential by assessing its financial status both past, present and projected.
Financial analysis can quickly detect any key areas of strength and weakness in your marketing campaigns, enabling the development of a far more effective and robust marketing strategy. By pinpointing income peaks and troughs against specific marketing campaigns an individual can quickly identify which, if any, are the most successful, therefore capitalising on this for future campaigns.
What does financial analysis involve?
Financial analysis is essentially evaluating which of the following stages your business is at; stable, solvent, liquid or profitable. An analyst will thoroughly audit all past and current business accounts, scrutinising invoices, income statements, balance sheets and cash flow statements in order to confirm a business’s profit margins and viability in the current market. Once completed, the financial analysis can provide valuable information to the business owner and potential investors about trends within the business’s financial history and how this positions them in the market place.
Analysts often compare the financial statements of one company with other external companies in their field for best practice and to aid in the production of accurate projections. The ultimate objective is to create a financial statement ratio that measures the ability of a company to create a return on their assets or pay off their debts in the future based on their financial history.
Who does a financial analysis?
Technically speaking, anyone with an understanding of your business and a head for figures can undertake a financial analysis, however it is wise to employ an expert for accurate market led projections, especially if you are seeking to persuade an investor. A reputable financial analyst will have a sound understanding of good business practices, in depth accounting experience and be acquainted with the necessary tools of financial statement analysis.
There are hundreds of companies across the UK offering bespoke financial analysis to suit both your business type and budget, so it really comes down to what you are looking to achieve with your analysis long term. Whatever the reason for carrying out a financial analysis, it is imperative that you are completely honest and open about all available finances in order to have a full and frank report that will benefit your business.