Financial Analysis Tools For Non-Finance Professionals!

Many of us know, how it feels when a functional head or a business leader doesn't find himself at the strategic discussion table. It's hard because we all want to contribute to the business. I know there can be many reasons for this but sometimes a common reason is the inability of business leaders to understand the business's financial health!

No matter in which function we work, as a business leader; understanding the BUDGETING method and business health through FINANCIAL STATEMENT & FINANCIAL RATIOS will give us a magnificent view of overall business & help to put better value for the business on the strategic decision-making table.

This understanding may start with the below three things:

1. Every company is different, so to understand your company's approach to the budget, you need to know the below budgeting models:

• Zero-based: Every budget line item starts at zero and must be justified by the leader.
• Incremental: The numbers from the prior budget are used as a starting point for the current budget. This is the traditional method of budgeting.
• Formula: Different units receive different budget percentages. For example, the decision may be to decrease bonus budgets by 10 percent across the company. However, executive bonuses may be decreased by 5 percent, while bonuses for the rest of the staff may be reduced by a larger percentage, but they both roll up into a number that is a 10 percent decrease overall.
• Activity-based: Budget is based on the value of a service or product for the company. For example, if a reseller like Amazon makes the strategic decision to sell more Amazon video services, the decision may be to invest a larger portion of the budget to marketing and sales instead of research and development.

2. Business health evaluated using financial statement & financial ratios and there are three commonly used reports as below:

Balance sheet: Its a snapshot in time of the company’s financial position

• Assets: everything a company owns
• Liabilities: everything a company owes
• Equity: what is left after a company pays all liabilities and liquidates all assets

Income statement: Is a measure of companies financial health for over a period of time like a year or quarter, also known as a profit/loss statement; measure of the company’s financial health over a period of time like a year or a quarter

• Revenue: company’s income
• Expenses: company’s costs
• Profits: the difference between income earned and operating costs

Statement of cash flows: Is a report of how much cash a company has on hand, or how liquid the company is

• Operating activities: buying and selling of goods and services
• Investing activities: gains or losses generated due to the company’s investments
• Financing activities: debt or financing a company acquires

3. A business may also use financial ratios (not an exhaustive list of possible ratios)

• Profit margin: the result of revenues minus costs.
• Earnings per share: (Net income–Dividends on preferred stock) / Average outstanding shares
• Return on investment (ROI): (Investment gains–investment costs) / Investment cost