The Importance of Financial Analysis for the Success of Your Business

When did you last dig into your financial statements for some analysis and insights? If the answer is “never,” you’re not alone. A compilation of statistics by QuickBooks shows that nearly half of business owners aren’t sure they are paying their taxes accurately, while 45% say that low financial literacy has cost them profits in their business venture.

Financial analysis ?isn’t something you will want to put off. It may be tempting to allow more pressing daily tasks to take priority, but there are good reasons to dive deep into your financials:

• Financial analysis examines your financial statements to give you a clear picture of your company’s performance—past, present and future.
• It provides key indicators of your solvency, liquidity and profitability.
• You will be able to make informed decisions when it’s time to take on more debt, look for another investor or move quickly on an opportunity.

Take a moment to consider that last point: You may be able to think of opportunities you have missed, simply because you could not determine with certainty that you could handle an acquisition, take on a fantastic employee or invest in the ideal property for your company. These opportunities are often what equips a business for growth, but if you don’t have a solid handle on your financial health, you may be uncertain whether you can move when a good prospect comes up.?

A key part of financial analysis is examining the profitability of your business. A good financial analyst will use a variety of formulas and ratios before making conclusions about the health of your company.

These indicators make it possible for your company to make decisions with clear information. Consider these specific examples:

• Should you continue running your operation as is, or do you need to improve profitability through cutting expenses, or by investing in efficiency measures?
• Is it best to rent or lease machinery instead of owning it?
• Should you increase your available capital by applying for a bank loan?
• Would it be better to expand your in-house team or outsource some of your business processes?

It’s possible that any one of these decisions in isolation won’t make or break your business, but it’s rare that business owners are limited to one or two decisions. An in-depth financial analysis allows you to encounter these situations with confidence.

5 Areas Where Financial Analysis Equips Your Business

An expert financial analyst will not only improve your view of your business’s health, but also serve to give vital information to stakeholders in your business. Take a look at these five areas:

Creditworthiness: When it’s time to secure a loan, you will have the right information to provide to the lender without a last-minute scramble. Even better, you will know whether your expectation of receiving funding is based on a foundation of good financial analysis.

Attracting Investors: Maybe you would rather meet with potential investors to secure more capital. You will be prepared for those meetings and your investors will be able to make a quick decision, allowing you to move forward with your plans.

Return on Investment: Before you sign that contract, before you make a big purchase, before you outsource, you’ll have a good idea of how your return on investment is currently faring with your business and know what to expect from additional areas you would like to invest.

Risk Mitigation: Every company takes on some risk, and as a business owner you are probably comfortable with a certain level of risk. An expert financial analysis will provide backbone to that comfort, allowing you to see where risk is simply part of pursuing an opportunity and where it should be minimized to protect your business.

Performance Measures: Financial analysis allows you to identify key performance indicators (KPIs) that align with your objectives for your business. Maybe you are trying to balance volume with sales numbers or improve efficiency on a particular product line. A financial analyst will help you choose the right metrics and monitor them.

Making a Case for Outsourcing Financial Analysis

If you’ve been a business owner for a while, or if you have an in-house accountant, you may wonder why you would invest in something you can do within your four walls. There are a few compelling reasons for considering an outsourcing partner who provides financial analysis:

It Broadens Your Insights: An expert who provides CFO services like financial analysis will have worked extensively across a variety of industries. They will have a different perspective from someone outside your company about risks, opportunities and how to gain efficiency in your operations.

It Frees Up Resources: If you don’t have an in-house accountant, outsourcing is a great way to hire exactly the services you need without paying for a salary, benefits and training. If you do have in-house accounting or finance help, you can outsource financial analysis in order to get fresh ideas about your financial health or to access deeper expertise. You may also allow your employees to focus on a specific project or lighten their load by outsourcing.

It Lends Credibility: When you have your financial reporting and analysis handled by a reputable provider, your lenders and investors will have that additional assurance that a qualified expert has examined your business and provided detailed insights into your business’s financial health.

When your business requires financial analysis by a qualified, expert provider, contact us at The Power CFO. We offer a full range of services, from basic bookkeeping to controller and CFO assistance. We equip your business to improve efficiency and increase profits, which are both foundational to drive growth for your business. We look forward to talking with you!