Analyzing Financial Statements for Improved Decision-Making

Financial reports are crucial for understanding business performance. They provide a detailed look at a company’s finances, including revenues, expenses, and cash flows. They’re important for making informed decisions and helping stakeholders understand the company’s financial health.

Navigating financial documents can be challenging. We’re here to help simplify financial management for you by breaking down what you need to know about analyzing financial statements for improved decision-making.

How Do I Analyze Financial Statements?

Before you analyze your company’s financial statements, it’s important to have a basic understanding of the key components:

1. Income Statement: This document shows a company’s revenues and expenses over a specific period, typically one year.
2. Balance Sheet: The balance sheet provides an overview of a company’s assets, liabilities, and equity at a given point in time.
3. Cash Flow Statement: This statement tracks the cash inflows and outflows of a company during a specific period. It shows how well a company can generate cash to fund its operations.

Tip: For more, check out our in-depth guide to understanding financial statements.

Analyzing financial statements means diving into and understanding the information in the balance sheet, income statement, and cash flow statement. This can give you insights into how your company is doing financially and point out areas for improvement or potential worries.

There are several methods for analyzing financial statements, including:

• Period-to-period comparisons: This involves comparing financial statements from different time periods, such as monthly, quarterly, or annually. It can help identify trends and fluctuations in financial performance.
• Budget to actual comparisons:  This involves comparing the company’s budgeted amounts to actual results. It can help pinpoint areas where the company is meeting or exceeding its financial goals, as well as areas that may need improvement.
• Ratio analysis: This method involves calculating various ratios, such as liquidity ratios (e.g., current ratio), profitability ratios (e.g., gross profit margin), and efficiency ratios (e.g., inventory turnover), to assess different aspects of your business’s financial health.

How Often Should Financial Statements Be Prepared?

The frequency of preparing financial statements depends on your business’s size and complexity. Generally, it’s recommended that you prepare them at least annually, but it’s best to consult with your accountant to determine the right frequency for your business’s needs.

Our estimated guidelines are:

• Annually: 50 – 100 transactions per year
• Semi-annually or quarterly: 100 — 200 transactions per 6 months or quarter
• Monthly: 200+ transactions per month

It’s important to note that there is no one-size-fits-all approach to analyzing financial statements. The best method will depend on the specific needs and goals of your business. It’s essential to consult with a financial professional for guidance and expertise in analyzing your company’s financial statements effectively.

Our Top 10 Financial Analysis Tips

Preparing financial statements can be a complex process, but it is crucial for the success of your business. Here are our top 10 tips you can start now:

1. Separate business and personal finances. To maintain transparency and avoid confusion, it’s vital to keep separate bank accounts, credit cards, and financial records for your business.
2. Regularly reconcile bank and credit card accounts. Reconciling these accounts can help identify any discrepancies or errors in your financial records and ensure accuracy.
3. Understand how to record transactions correctly. Properly recording transactions is essential for accurate financial statements. Consult with a professional if you are unsure how to record a transaction correctly.
4. Know and understand your payroll tax liability obligations and deadlines. Payroll taxes must be paid on time to avoid penalties and interest. It’s essential to stay informed about your company’s payroll tax obligations and deadlines.
5. Regularly review and understand your financial position. Regularly reviewing and understanding financial statements can help identify areas for improvement and make informed decisions about the company’s future. Consistently monitoring your business’s financial health is crucial for its success.
6. Keep accounting records up to date: Accurate accounting records are essential for preparing financial statements and making informed business decisions. It’s crucial to keep these records updated regularly.
7. Know what transactions affect what statements. Understanding how different transactions impact each financial statement can help ensure accuracy and provide a clearer understanding of your company’s financial performance.
8. Understand what your income statement and balance sheet show. The income statement shows your company’s revenues and expenses, while the balance sheet represents its assets, liabilities, and equity. Understanding these statements’ purpose can help in their analysis.
9. At a minimum, review your balance sheet and income statement semi-annually. Regularly reviewing these statements can help identify trends and potential concerns in your company’s financial performance.
10. Consult with a professional. When in doubt, it’s always best to consult with a professional CPA or CFO for guidance on managing your business’s finances effectively. They can provide expertise and assistance in preparing financial statements, analyzing them, and making informed financial decisions for the success of your company.

Trust SME CPAs with Your Financial Analysis

At SME CPAs, we understand the importance of accurate and timely financial statements for your business’s success. With more than 70 years of experience in accounting and financial management, our team can provide expert guidance to help you prepare and analyze your company’s financial statements effectively. Contact us today to learn more about how we can support your business’s growth.