Better Business Through Financial Analysis
Financial analysis provides a window into the financial status of your business and valuable insights that you can use to improve business performance.
Understanding your business’s financial health is vital in today’s fast-changing economy. Financial analysis can offer great insight into business performance and your ability to survive different market conditions. The information gleaned from measuring efficiency and profitability can help you stay the course or reorganize your efforts to improve your financial status.
The Key to Success
Keeping track of your income and expenses is just the beginning of understanding your profitability. You also need to know what needs to change and when and how to make those changes. Financial analysis is the key. Here are five helpful tips on what financial analysis can do to help you run a profitable business.
1. Revenue: Obviously, revenue is a good indicator of financial health, but it has components beyond income versus expenses that you want to analyze:
- Revenue growth. Review previous revenue divided by current revenue, excluding one-time revenues, which can alter the outcome.
- Revenue from a varied client base. Assess your client base, looking for a balance of revenue from numerous customers. If one client generates the bulk of your revenue, beware. If you lose that client, your business could be in deep trouble.
- Revenue from productive employees. Determine productivity through financial analysis that will demonstrate which employees are efficient and which aren’t.
2. Profitability: It’s important to compare revenue from sales with the operating expenses and other expenses such as interest and taxes. Looking closely at how your business fares when sales are tallied against expenses can help determine future growth.
3. Efficient operations: Measure how well you use your business’s resources to maintain adequate income. Use financial analysis to understand how much you sell and how expediently customers pay. Too much inventory indicates not enough sales or overproduction. Inefficient credit management cuts into profits and prohibits growth.
4. Solvency: Solvency is your ability to pay for long-term debts and financial obligations, and it’s another measure of your business’s financial health. The easiest way to assess solvency is to look at total assets minus total liabilities. A solvency ratio or debt-to-assets ratio may be used to take a deeper dive into analyzing business solvency.
5. Liquidity: Liquidity refers to how much cash you have available and how quickly you can convert assets to cash. It’s a measure of your business’s ability to cover short-term obligations with liquid assets or by generating cash.
Using Technology for Financial Analysis
With Amegy Bank’s Treasury Gateway, you can access to your company’s financial data at a glance, including banking information, payment solutions and specialized reports available on your dashboard. You also can leverage technology to simplify financial analysis, including improving cash forecasting and streamlining accounts receivable. Contact your business banker to learn more.