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Revealed: The secret to successful financial statement analysis

by , 20 June 2014
Your business finances are... Well, your business. And that mean you may believe the best and only way to monitor your finances is in a bubble. After all, there's no company like yours so how could you possibly compare your growth or short comings to someone else's?

This is completely the WRONG approach to your financial management.

Yes, there may be no company quite like yours, but you're in the same industry as many other companies. The economic market affects those companies the same way it affects you.

And therein lies the secret to successful financial analysis...

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The secret to your financial statement analysis lies in the success of other companies 

If you look at your business' finances and you see you've made a profit, you'll think you're doing well.
 
But this is profit without any context. According to the Practical Accountancy Loose Leaf Service, you must compare your financial statements to those of other companies. This will give you context.
 
For example, let's say, you sell furniture. And in the past year, you made a profit of R100 000.
 
But then you look at your competitor's financial data and they made a profit or R300 000.
 
You're both in the same market and industry but they made more money than you did. This will give context to your finances.
 
As the Loose Leaf says, you can benchmark your performance against other companies' annual reports and see your relative strengths and weakness.
 
So how exactly do you go about comparing your finances?
 

Use these two pieces of financial information to compare your finances to your competitors 

If you want to compare your financial statements to your competitor's you must use your:
 
 
We advise you to compare the percentages between several businesses of different sizes. This will give you even more context.
So remember to include this to your finances analysis tools for successful financial statement analysis.


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