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To ensure your business is healthy do a financial analysis on your income statement

by , 20 June 2014
Your business finances are always changing. Some months they look great, others they look pretty average.

To ensure you're not making huge financial losses, you need to do a financial analysis on your income statement. This will help you see what you're doing right in the good months and what you're doing wrong in the bad.

This way, you can keep your finances healthy and moving in the right direction, even in a slow month...

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Analyse your income statement to keep your finances healthy

Your income statement, or 'statement of comprehensive income', shows the amount of money that comes into your business. 
It must reflect where, when and how much money comes in each month. 
 
To make sure those amounts keep growing, you must do financial analysis using profitability analysis and return on investment analysis.
These two tools will help you look at difference types of income. So how do you use them?
 

Here's how to use profitability analysis

With this type of analysis, you'll examine how much profit your business actually makes. 
To do this, look at your:
 
- Gross profit %
(Revenue – cost of your goods sold)/revenue * 100
 
- Operating profit %
(Revenue - cost of your goods sold – operating expenses)/ revenue * 100
 
- Net profit %
(Revenue – cost of your goods sold – operating expenses – interest and taxes)/ revenue * 100
 
These percentages show how much money your company has once you've paid off your expenses.

Now let's look at return on investment analysis...
 
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Here's how to use return on investment analysis

This kind of analysis can help you see how your investments are doing. For example, are they growing or decreasing?
To do this, look at your:
 
- Return on equity 
(Net profit after tax/beginning of the period shareholders' equity) * 100
 
- Return on assets
(Net profit after tax/beginning of period total assets) * 100
 
- Return on operating assets
Net profit after tax/beginning of period operating assets
 
- Operating asset turnover rate
Revenue/operating assets
 
- Financial leverage
Operating profit/net profit
 
This analysis will help you see how much money your investments bring into the company.
 
By looking at your profit from sales after your expenses and your returns on investments, you can make sure your business is always making money and never losing it. 

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