Financial analysis: Here's what to analyse to measure your success or failure
We all wish we could predict the future or solve problems before they become big ones. This would be particularly helpful when running your business, but sadly, no one can predict the future.
There is, however, something you can do. With financial analysis, you can spot problems in your business's finances before they damage your company or before they even happen. There are two particular financial statements you must analyse.
Keep reading to find out what you must analyse and the tools you must use to do it.
Analyse financial statements, identify errors with checklists, step-by-step instructions & examples
Two crucial financial statements you must analyse
1. Statement of comprehensive income (income statement)
You'll analysis your income statement with the profitability analysis and return on investment analysis tools; and
2. Statement of financial position (balance sheet)
You must use the financial risk analysis and return on investment analysis tools.
But what exactly are these tools? And what will they show you?
Three accounting record risk areas to watch out for
The three financial analysis tools you must use
These are the three tools you must use to do your financial statement analysis:
1. Profitability analysis
- Gross profit %;
- Operating profit %; and
- Net profit %.
2. Return on investment analysis
- Return on equity;
- Return on assets;
- Return on operating assets;
- Operating asset turnover assets; and
- Financial leverage.
3. Financial risk analysis
- Total debt ratio;
- Interest cover ratio;
- Debt to equity; and
- Loan to value.
You can use other analysis tools in financial statement analysis, but these three are the most common and vital. They'll help you see where you're earning money and where you could lose money. From there, you can take steps to fix problems and increase growth.
Without financial analysis you may not be able to do either of these so ensure you analyse your company's finances carefully.
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