How can businesses analyze their financial position?
To help you best analyze the financial position of your company, we asked CFOs and business leaders this question for their best insights. From examining the current ratio of liabilities and assets to analyzing your operating profit margin, there are several ways to analyze the financial position of your business to help you determine how well your company is doing.
Here are 10 ways to analyze your company’s financial position:
- Examine The Current Ratio of Liabilities and Assets
- Assess Your Marketing Profitability.
- Consider Your Access To Usable Cash
- Look at Your Cash Flow
- Analyze The Income Statement
- Determine Your Liquidity With Online Ratio Calculators
- Use a Financial SWOT Analysis
- Audit Financial Figures Using All Corporate Limitations
- Determine The Lifetime Value of Each Customer
- Analyze Your Operating Profit Margin
Examine The Current Ratio of Liabilities and Assets
There are many complex formulas to analyze the financial position of a business but the least complex and most telling is the current ratio of liabilities and assets. Sales prognostications and financial forecasts can factor into educated predictions about where a business can be, but the current state of what is owned and what is owed, provides for a concrete answer to where it is now.
Doing a complete analysis requires factoring inventory, equipment, and in some cases, accounts receivable, and then doing the same with outstanding balances, bills, interest rate payments, and loans. By taking this information and dividing current assets by current liabilities, you will come up with a current ratio that is accurate for a 12-month period. In using the current ratio method, you can acquire relevant knowledge on the state of your financial business, as well as have enough time to change course if needed.
Anthony Puopolo, Rex MD
Assess Your Marketing Profitability
The success of your marketing campaign paints a clear picture of your business’s financial health. If you’re spending a fortune to organize and execute your campaigns, but it isn’t resulting in any noticeable return-on-investment, your business might be operating at a loss. Likewise, if your marketing efforts haven’t caused your client base to increase or decrease, then it’s a sign of financial stagnancy.
The most profitable businesses are those with visible gains – greater lead generation and conversion rates – from their campaigns. Even an extended customer retention rates shows financial health for your company because it says your audience is still interested in your offer. People often view sales and marketing as separate entities, but when it comes to profits and losses, they work best when viewed as a working unit.
Brian Nagele, Restaurant Clicks
Consider Your Access To Usable Cash
I’m CEO of an invoice factoring service through the Southern Bank, and a question I wish more businesses would ask themselves sooner is “do I have liquid cash?”. It can be easy to look at the books and say they are balanced, but if they are only projected to be balanced once your clients pay their invoices you could be sunk.
Businesses need to seriously consider what would happen if they needed to spend significant cash in the next couple of days. Would they be able to do it, or would it require a loan extension, overdraft or going over your credit limit? Or worse, would it be impossible? Profiting is one thing, but access to usable capital for emergencies or expansion with short notice can be the difference between staying afloat and going under.
Gates Little, altLINE Sobanco
Look at Your Cash Flow
In today’s world, businesses are more than just their products. They’re also about the people who work there, the customers they serve, and the communities they call home. The financial health of a business is only one part of its overall success – but it’s an important one! And if you want to make sure that your business is doing well in this area, there are some key things you can do.
For starters, look at your cash flow. If you’re not making money from sales or investments, that means you don’t have enough cash on hand to pay all your bills on time and keep everything running smoothly. A good way to figure out whether or not this is happening is by tracking your revenue over time—if it’s going up month after month (or quarter after quarter), then congratulations! Your business is growing steadily and successfully. If not… well then maybe it’s time for a change of course!
Nick Cotter, Growann
Analyze The Income Statement
The income statement examines revenue, expenses, and profits earned to indicate a company’s financial status and performance through time. A trial balance comprising transactions from any two points in time can be used to build it for any period. The gross profit is calculated by subtracting the revenue collected for the period from the cost of production for products sold on the income statement. It then subtracts all other costs, such as employee wages, rent, and power, as well as non-cash costs like depreciation, to get at earnings before interest and taxes (EBIT). Finally, it subtracts interest and tax payments to establish the net profit that remains for the owners. This money might be distributed as dividends or reinvested in the business.
Ayman Zaidi, GreatPeopleSearch
Determine Your Liquidity With Online Ratio Calculators
Use online ratio calculators to determine your liquidity, efficiency, profitability, and leverage ratios. Liquidity measures your current ability to meet short-term commitments financially. Efficiency measures how quickly you turn over your inventory. Profitability simply means the viability of your company based on the profits of your competitors and your net profit worth. Finally, understanding your long-term debt can determine your company’s solvency, otherwise known as leverage. Ratio calculator tools can address all of these ratios to give you a clear picture of your business’ finances.
Erin Banta, Pepper
Use a Financial SWOT Analysis
Financial SWOTs are an effective method for assessing a company’s finances. SWOTs are an ideal tool for modeling analysis across a variety of categories including finances. The acronym stands for strengths, weakness, opportunities, and threats. Companies should reflect on these components of the model from a financial perspective. What are their strengths as it relates to capital, credit, and debts? What are their weaknesses as it relates to the many facets of finance and how are they positioned as it relates to future opportunities and threats.
This model allows for company leadership to conceptualize their organization in the big picture of financial realities present and future. It should be a primary tool for analyzing the financial positions of organizations.
Sean Doherty, Box Genie
Audit Financial Figures Using All Corporate Limitations
Financial analysis requires examining the broad sections of the balance sheet and income statement while emphasizing the most important components. For Example, in banks and financial institutions, net interest revenue is shown first, followed by fees, commissions, and miscellaneous income. Then, expenses, depreciation reserve, the share of revenues from JVs, shareholders, etc. are shown.
Analyze each line in comparison to historical patterns and competitors. Highlight areas of vulnerability such as net interest margin and declining fee revenue as a consequence of… etc. Likewise with the balance sheet. Determine if the growth or decrease of the main business is in accordance with market or company strategy. The aforementioned are only highlights, but they serve as a starting point. Then just augment and expand upon it. You can evaluate cash flows, the equity statement, etc.
Huzaifa Ahsan, FindPeopleFirst
Determine The Lifetime Value of Each Customer
Your customers are the key to your financial success. Calculating how profitable the typical customer is over a “lifetime” with your company can help you analyze your financial position. For instance, you might lose money to acquire a new customer at first. But after you find the LTV (Lifetime Value) of customers, you can see further into the future.
Perhaps a typical customer increases your profits by $1,000 over the years they spend with you. Then you know what you can safely spend to attract new customers to your business. When your company is in a heavy growth phase, your immediate financial position might not look as positive as it really is. But the LTV tells you the fruits of your labor will be realized later.
Scott Lieberman, Touchdown Money
Analyze Your Operating Profit Margin
Operating profit margin is the best tool for analyzing a company’s financial position. A variety of metrics are useful in the process, but the Profit margin is one of the excellent indicators to analyze the financial position. It helps investors and analysts to evaluate the company as a potential investment.
Profit margin provides information on how company managers are at controlling expenses and generating revenue. It checks the profitability and efficiency of the company by comparing the amount the company earns before interest and taxes on sales are calculated by analysts, which measure the company’s growth. A high operating profit margin indicates that the company is managing costs and generating good sales.
Shivanshi Srivastava, PaydayLoansUK