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Financial analysis: Here's what to analyse to measure your success or failure

by , 04 June 2014
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.

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Analyse financial statements, identify errors with checklists, step-by-step instructions & examples
 
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Two crucial financial statements you must analyse 

The Practical Accountancy Loose Leaf says you must analyse these two types of financial statements:
 
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?
 
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Three accounting record risk areas to watch out for
 
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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
This analysis shows how profitable your business is. To measure profitability, look at your: 
- Gross profit %;
- Operating profit %; and
- Net profit %.
 
2. Return on investment analysis
This analysis shows how well your investment is doing. To measure return on investment, you must look at your: 
- 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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