Finance Write For Us – You can measure the company’s success in many ways. Receiving positive reviews online, serving new customers, and increasing web traffic are all good indicators that your business is doing well.
But if you want to know the company’s success, you must understand how it works financially. After all, even a popular business can fail if it has cash flow problems or lost profits.
Better financial management directly correlates to better financial health. Understanding the company’s financial state can help you make smarter business decisions, create long-term plans, and understand economic trends within the company. Plus, studies show that business owners who understand their finances are more likely to be successful.
Conducting a financial analysis will help you more accurately determine the financial status and success of the business. You can hire a financial analyst to do the heavy lifting for you or perform a financial analysis yourself.
Every business owner should include seven critical components in their analysis:
1. Income Statement
An income statement, or profit and loss declaration, is one of the three most significant financial statements for running and operating a successful business. An income statement indicates whether the company is making or losing money. Compare income with expenses and calculate profit or loss over time.
An income statement can help identify significant expense categories and lower income streams if profits are down. If profits are high, an income statement can help identify the most productive factors so you can focus on what brings the most money to the business.
Generating an income statement each month is common, allowing you to chart growth and sales trends over time.
2. Balance sheet
A balance sheet is the second most important financial statement in running a successful business. A balance sheet subtracts what the company owes (liabilities) from what it owns (assets) to calculate net worth.
Understanding your company’s net worth can help you monitor your company’s financial performance and communicate with investors. Beyond that, a balance sheet can help identify patterns in finances, spot hidden costs, and reduce unnecessary spending.
3. Cash flow statement
A cash flow statement completes the financial statement triplet for running a business effectively. A view of cash flows records money going in and out of business, giving the company a picture of changes in the cash balance.
A business can be profitable but still struggle with cash flow. Not to be confused with earnings, cash flow measures whether the company’s available cash increases or decreases. A 2020 QuickBooks survey revealed that most small business owners (62%) struggle with cash flow. These issues were surprising for almost half of them (44%).
4. Accounts Receivable Report
Understanding the company’s earnings and cash flow is a significant first step in understanding the financial statement. Analyzing an accounts receivable report goes a step further.
Accounts Receivable measures the dollar amount of credit sales not collected in cash. Fashionable, in other words, represents the amount of money owed to the company. Funds receivable report monitoring can help you identify past-due payments and implement a collection process.
Beyond that, you can use the accounts receivable report to calculate the funds receivable turnover ratio. This ratio event the efficiency with which the company collects revenue. A higher ratio indicates that the company receives customer payments more frequently during the year. A lower ratio could reveal an opportunity to improve cash flow.
5. Accounts Payable Report
On the other hand, an accounts payable report measures the total amount of unpaid invoices owed to third parties for products and services that were invoiced. Accounts payable are considered a liability on the balance sheet.
In addition to keeping track of short-term debt, the mature accounts process is essential in determining the company’s financial health. Over half of small businesses experience cash flow forecasting issues due to accounts payable issues.
A great insight into accounts payable helps you create spending strategies and pay off debt. Tracking invoice data in the accounts payable report clarifies transaction history, helping you identify and resolve spending issues.
6. Inventory report
In retail stores, an inventory report summarizes existing inventory. It’s a lot of information for small business owners hoping to understand their financial status, but this report is rarely used. An inventory report can help you identify which products are selling and which are taking up valuable shelf space.
Use an inventory report to calculate the turnover rate. This ratio measures how often the company sells and replaces inventory.
A higher inventory turnover rate indicates strong sales and fast-moving products. A lower ratio suggests weak sales and excess inventory or low demand. However, a higher balance could result in lost sales if insufficient stock meets customer demand.
Accurately tracking inventory and understanding turnover can help you avoid overordering products and maximize sales.
7. Important financial indexes
There are a few more critical financial ratios to consider as you assess the company’s financial health.
Current Cash Ratio: The current cash ratio is a crucial metric in determining the business’s financial health. It simply determines if the company can pay the debts or not. Divide current assets by current liabilities to determine if the business has enough existing assets to pay current liabilities. If the current liquidity ratio is less than 1, you may need to borrow or sell some assets.
Liquidity Indicator: Similarly, the liquidity indicator or “acid test ratio” is a test of liquidity. It measures the company’s ability to pay current liabilities with cash assets (or quick assets easily converted to cash within 90 days). It determines how quickly the company can pay off its debts. Monitoring the liquidity gauge can help you stay on top of finances and understand the level of savings support your business needs.
See the big picture.
Each of these reports and indicators acts as a small piece of the giant puzzle that is the company’s financial statement. A business may be profitable but may be struggling with cash flow. A company may have cash flow but may work with equity. By performing a comprehensive financial analysis, you’ll gain an overview to make smart money decisions for the company and see true business success.
Creating accurate financial reports is easier when you use accounting software like QuickBooks Online. QuickBooks automatically tracks and categorizes business expenses, providing the data you need to predict and manage cash flow.
If you use Amazon Business, the Amazon Business Purchases app is an innovative and easy way to track and import transactions into QuickBooks. Plus, QuickBooks has built-in financial reports like income statements, cash flow statements, and accounts receivable reports, giving you the financial information you need when needed.
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