Three reasons why you need to analyse your financial statements
You probably have an accountant who prepares your financial statements diligently every month.
And what usually happens... you file them away, without so much as a second glance.
I know you don't worry about preparing your financial statements because you have a competent team who you know and trust to do it.
But you really should be analysing your financial statements. Here's why…
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Why you need financial statements;
Your legal accounting reporting obligations with IFRS, The Income Tax Act and The Companies Act of 2008;
The trial balance – the first step to creating your financial statements;
How to prepare your income statement and balance sheet;
Cross-checking with other reports, ledger, fixed assets register, inventory list etc.; and
Red flags to look out for.
Two pieces of financial information you must analyse
When you analyse your financial statements there are two pieces of information you should look at:
1. Statement of comprehensive income (Income statement); and
2. Statement of financial position (Balance sheet).
Analysing your financial statements can save your business
Here's three reasons why you should analyse your financial statements regularly:
You can spot trends in your business. And see problems that exist or may soon exist so you can plan for them. If you plan correctly, you won't have a strain on your cash flow.
It allows you to allocate resources and evaluate potential projects for maximum return on investment. So you'll spend more on projects that make more money for your company and scale back, on the ones that don't.
Not analysing financial statements and information can lead to untold problems. For example, you could have a situation where you have an overdrawn bank account, can't pay for salaries or even bankruptcy.
If you don't monitor your cash flow, you might land up in a situation where you don't have enough money to make your payments. Let's look at what happened to Mike when he didn't.
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A good example of why you should analyse your financial statements
Let's look at an example.
After experiencing a really good month of sales, Mike, a business owner of a small chocolate factory, expects his bank account to show a large positive bank balance. When he checks, he sees that his bank account is overdrawn (in negative). Mike can't pay for the raw material cocoa used in production and declares insolvency.
His colleague analyses his position and realises that all his cash was actually invested in his large chocolate inventory – he liked to keep a large amount of chocolate on hand in case his clients ordered more. Mike could've avoided it if he had had a better understanding of his financial performance, by analysing his Income Statement and Balance Sheet.
Don't make the same mistake as Mike. Find out exactly how to analyse your financial statements at our interactive Financial Statements workshop
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