The importance of business financial management and analysis
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 measure where you are in your strategic plan, telling you where changes to your plan are necessary. Because of this, financial data analysis and management are vital to running a successful business.
It is extremely important to have a proper accounting system installed throughout your company to make data acquisition easy. You cannot run your business for profitability without a good accounting system. My CPA has an accountant who comes into the business to help set up 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 in helping you capture financial data. Having a functioning Accounting System in place will minimize the fees a CPA charges to analyze your tax liability and prepare your tax returns.
An accounting system is generally based on the following key financial management tools:
– Income statement (Profit and loss statement)
– Cash flow statement
– Balance sheet
– Break-even point of analysis
By having a financial management system in place, you can easily identify early warning signs or spot particularly profitable areas. Not having a system to analyze and organize financial data makes it impossible to manage, grow and control a business effectively. Makes it impossible to measure the success (or lack thereof) of your Planning and Strategy. Furthermore, if misused, inaccurate financial data can be disastrous for the livelihood of a business.
An accounting and financial management system is only as useful as it is used consistently throughout the business. It is extremely important to implement the system in the very structure of the company and to use it in a systematic way. The Accounting System is a reflection of the health, or lack thereof, of a business and from which business decisions are made. Make sure you set it up correctly, train your people on it, and most importantly, use it!
The two main objectives of any business are to be profitable and to have cash flow to pay obligations. The income statement and the cash flow statement occupy a prominent place in this area. The income statement represents how well a business is operating and the cash flow statement shows how well a business 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 Cash, which when not well planned can be very difficult to maintain. Rapid growth with high profits can drain a company’s liquidity, so being profitable is no guarantee that it will stay in business. The role of current and projected cash flow and income statement is to help you identify problem areas so that you can plan for them effectively, such as raising more capital, injecting more capital, or obtaining financing. Additionally, these two statements help you identify areas that can be better controlled and managed, avoiding the need for additional capital and financing.
The equilibrium analysis is based on the cash flow and profit and loss statement. The balance chart and statement are extremely important because they show the volume of sales revenue that is required to accurately balance the sum of your fixed and variable expenses. Equilibrium analysis can be extremely useful when:
– Establish price levels for products and services
– Decide whether to buy or lease equipment / building
– Calculate profit projections based on various levels of sales.
– Determine if new employees are required
– Advance planning of finances / capital needed in the future
– Make strategic objectives more tangible and achievable
– Measure your company’s progress towards profit targets.
The Balance Sheet records the past effects of company decisions (or lack thereof) and projects the effect of future Plans. The balance sheet is a record of the liquidity and equity of the company. These variables are directly affected by the income and cash flow statements. The balance sheet is the financial one that is often overlooked, but it is very useful:
– Shows the effect of past decisions.
– Keeps track of the company’s cash liquidity position
– Records the level of equity of the owner
– Quickly display the status of the business.
A budget analysis compares the actual performance of a company with the projected performance on a monthly, quarterly, and yearly basis. The Budget is a great tool to protect against excessive and unmitigated expenses and is closely linked to the Strategic Objectives that the company has established. Analysis of income statement and cash flow statement projections against actual performance is an excellent monitoring tool that can quickly address problems before they become too serious. Small oversights and errors in a company’s projections over time can have a disastrous effect. Budget analysis is your guard against that.
Working together, the income statement, cash flow statement, balance sheet, equilibrium analysis, and budget analysis provide a complete picture of a business’s current operations, liquidity, past operations, and future viability. Working through an interactive accounting system can be a very useful tool for determining future business scenarios and analyzing past errors. Understanding the financial implications of your financial decisions can mean the difference between success and failure for your business. Probably the most important financial statement is your cash flow statement, but understanding all of these financial aspects and how they work together is the key to a successful business. Projections are based on assumptions; make sure they are well thought out and as realistic as possible.