If you’re a company that works with investors, you are probably accustomed to providing financial statements when making pitches for funding and at board meetings. After all, investors want to measure your potential for continued growth, and solid financial data provides them with the reassurance that you manage your cash wisely. But you, as a business owner, should also consider how to use your own financial statements as a tool because they can provide you with crucial snapshots of data that indicate your company’s progress, financial stability, and areas in need of improvement.
Let’s start by looking at the big picture areas that investors often consider so you can understand how to use your own statements as a tool. We’ll then dig into some smaller details that are excellent ways to analyze your company’s financial position. In analyzing your financial statements, investors are often trying to ascertain your financial health and profitability, your position in relation to competitors within the same industry, and the strength of your company’s management and their ability to handle funds. To do so, the most common documents they will examine are: your balance sheet, which provides a good overview of your assets versus your liabilities; your income statement, which provides information on revenue, expenses, and net profit; and your cash flow statement, which indicates money flow in and out of the company.
By examining these documents they are trying to come up with a full picture of your company’s financial health so they can make decisions about such endeavors as fundraising, budget adjustments, and plans for expansion. Some of the financial information they will explore are:
Revenue–how much money your company has brought in during a set period of time.
Debt–while it is assumed that companies will carry debt, investors will look for your ability to cover debt costs without significant financial strain.
Profitability–by comparing net income against expenses, investors assess management’s ability to balance financial give and take to create profit.
Cash flow–investors monitor the influx and outflux of cash to understand whether you can handle increasing debt payments and whether you have a sufficient cash reserve to cover unexpected costs.
In considering these larger concepts, not only investors but you as well, can assess areas of strength and weakness that will help you as you build. Some of the smaller specific considerations that will help you in your analysis are:
Sales–calculating percentage of sales growth can answer crucial questions about marketing strategies, managerial ability, and at what rate you are generating revenue.
Profit margins–profit margins not only allow you to assess the efficacy of procedural and material costs, but they also provide the opportunity to compare against competitors and adjust according to your strength and position within the market.
Customer acquisition costs–calculated by dividing the sum of sale and marketing costs by the number of new customers, customer acquisition provides the opportunity to evaluate ways to trim the cost of bringing on new accounts.
Customer churn rate–this analysis of customers lost each period provides the chance to evaluate marketing strategies, need to emphasize new acquisitions, and an understanding of relative strength of competitors.
Accounts receivable turnover–the efficiency with which you collect cash is a key indicator of your ability to absorb unexpected costs and to expand as you accrue more debt.
Break-even point–understanding the point at which you have covered all expenses helps you to assess need for cost cutting measures, strength of revenue stream, your potential for growth, and even your ability to generate needed cash flow.
Written by Ivan Young in partnership with silverware wholesaler, Silver Superstore.