The importance of financial analysis and management of companies

Planning and control are the two most important ingredients for a successful business. A business plan takes most of the guesswork out of business strategy and control through sound financial analysis. Financial data provides a way to assess where you are in your strategic plan and tell you where changes are needed in your plan. For this reason, financial data analysis and management are vital to running a successful business.

It is extremely important to have a proper accounting system in place throughout your business so that data collection is easy. Without a good accounting system, you cannot steer your business towards profitability. My CPA has an accountant who comes to the store to help install the accounting system and show us how it works. All of this is done with the guidance of the CPA, but at a fraction of the cost. A good accountant is invaluable when gathering financial data. An established, functioning accounting system will minimize the fees a CPA charges for analyzing your tax liability and preparing your tax returns.

An accounting system is typically built around the following key financial management tools:

– Profit and Loss Account (Profit and Loss Account)

– Cash flow statement

– Record

– Household

– Breakeven analysis

By setting up a financial management system, you can easily spot early warning signs or identify particularly profitable areas. Without a system for analyzing and organizing financial data, it is impossible to effectively manage, grow and control a business. It makes it impossible to measure the success (or failure) of your planning and strategy. Additionally, if used incorrectly, inaccurate financial data can have disastrous consequences for a company’s existence.

An accounting and financial management system is only as useful as it is used systematically across the organization. It is extremely important to implement the system into the structure of the company and to use it systematically. The accounting system is a reflection of the health or lack of a company and on the basis of which business decisions are made. Make sure you set it up properly, train your people on it, and most importantly, use it!

Two main goals of any business are profitability and cash flow to pay obligations. In this area, the income statement and the cash flow statement play a prominent role. The income statement shows how well a company is operating, and the cash flow statement shows how well a company is managing its cash. Profit or loss on the one hand and liquidity on the other.

The trick is to find a good balance between profit and liquidity which, if not planned well, can be very difficult to maintain. Rapid growth with high profits can deplete a company’s liquidity, so profitability is no guarantee that you will stay in business. The role of the existing and forecast cash flow and income statement is to help you identify problem areas so you can plan for them effectively, such as: B. raise more capital, contribute more equity or receive funding. Additionally, these two statements will help you identify areas that can be better controlled and managed, thereby avoiding the need for additional capital and finance.

The breakeven analysis is based on the cash flow and income statement. The breakeven point and chart are extremely important as they show the volume of revenue from sales required to accurately balance the sum of your fixed and variable expenses. Breakeven analysis can be extremely helpful when:

– Setting price levels for products and services

– Decision to purchase or rent equipment/buildings

– Find out profit forecasts based on different sales stages

– Determine whether new employees are needed

– Plan ahead for the funding/capital that will be needed in the future

– Make strategic goals more tangible and achievable

– Measure your company’s progress towards profit goals

The balance sheet records the past effects of business decisions (or lack thereof) and forecasts the effects of future plans. The balance sheet is a record of the company’s liquidity and equity. These variables are directly affected by the income and cash flow statements. The balance sheet is the often-overlooked financial thing, but it has many uses:

– Shows the effect of past decisions

– Tracks the company’s cash liquidity position

– Records the amount of equity

– Quickly shows the state of the company

A budget analysis compares a company’s actual performance to projected performance on a monthly, quarterly, and yearly basis. The budget is a great tool to protect against excessive, unabated spending and is closely linked to the strategic goals that the company has set. Analysis of income statement and cash flow statement forecasts versus actual performance is a great control tool that allows problems to be addressed quickly before they become too serious. Small omissions and errors in a company’s forecasts spread over time can have catastrophic consequences. The budget analysis protects you from this.

Working together, the income statement, cash flow statement, balance sheet, breakeven analysis, and budget analysis provide a complete picture of a company’s current operations, liquidity, past operations, and future viability. Working with an interactive accounting system can be a very useful tool for determining future business scenarios and analyzing past mistakes. Understanding the financial implications of your financial decisions can mean the difference between the success and failure of your business. Probably the most important financial metric is your cash flow statement, but understanding all of these financial metrics and how they work together is key to a company’s success. Forecasts are based on assumptions – make sure these are well thought out and as realistic as possible.