A Statement Of Cash Flow Is Not Used To: The Importance of Business Financial Analysis and Management

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The Importance of Business Financial Analysis and Management

Planning and control are two important factors for a successful business. Most of the forecasting from business strategy and control is accomplished through sound financial analysis in the business plan. Financial data provides a way to measure where you are in your strategic plan, telling you where your plan needs to change. Because of this, financial data analysis and management is extremely important for running a successful business.

It is very important to establish a proper accounting system in your business so that data acquisition is easy. You cannot manage your business profitably without a good accounting system. My CPA has a bookkeeper that comes into the business to help us set up the accounting system and show us how to make it work. All this is done with the guidance of a CPA but at a fraction of the cost. A good bookkeeper is invaluable in helping capture financial data. Having an established working accounting system will reduce the fees a CPA charges for analyzing your tax liability and preparing your tax returns.

Accounting systems are generally built around the following key financial management tools:

– Income Statement (Profit and Loss Statement)

– Cash flow statement

– Balance sheet

– Budget

– Breakeven analysis

With a financial management system, you can easily identify early warning signs or spot particularly profitable areas. Lack of a system to analyze and manage financial data makes it impossible to effectively manage, grow and control a business. This makes it impossible to measure the success (or lack) of your planning and strategy. Moreover, misused, inaccurate financial data can be fatal to a company’s livelihood.

An accounting and financial management system is only as useful as it is used systematically throughout the business. It is extremely important that the system is implemented and used systematically in the very fabric of the business. The accounting system is a reflection of the health or lack thereof of a business and from which business decisions are made. Make sure to set it up correctly, train your people on it, and most importantly, use it!

The two main goals of any business are to be profitable and to have cash flow to pay liabilities. Income statement and cash flow statement are prominent in this area. The income statement shows how well the company is doing and the cash flow statement shows how well the business is managing its cash. Profit or loss on one hand and liquidity on the other.

The trick is to find a good balance between profitability and liquidity, which can be very difficult to maintain without proper planning. Rapid growth with high profits can drain a business of liquidity, so being profitable is no guarantee that you will stay in business. The role of the current and projected cash flow and income statement is to help you identify problem areas so you can plan effectively for them, such as raising more capital, raising more equity, or obtaining financing. Moreover, these two statements help you identify areas that require additional capital and funding that can be better controlled and managed.

Breakeven analysis is based on cash flow and profit and loss statements. Breakeven statements and charts are extremely important because they show the sales revenue needed to exactly balance the sum of your fixed and variable costs. Breakeven analysis can be extremely useful when:

– Setting product and service price levels

– Deciding whether to buy or lease equipment/building

– Making profit estimates based on different sales levels

– Determining if new staff are required

– Planning of future finance/capital requirements

– Making strategic objectives more tangible and achievable

– Measuring your company’s progress toward profitability goals

The balance sheet records the past results (or lack thereof) of the company’s decisions and projects the results of future plans. A balance sheet is a record of a company’s liquidity and owner’s equity. These variables directly affect income and cash flow statements. The balance sheet is an often-overlooked piece of finance, but it has many uses:

– Shows the effect of previous decisions

– Tracks the company’s cash liquidity position

– Records the level of owner’s equity

– Quickly shows business status

Budget analysis compares a company’s actual performance with projected performance on a monthly, quarterly, and annual basis. A budget is a great tool to guard against excessive, unreduced costs and is closely linked to the strategic goals set by the company. Analyzing income statement and cash flow statement projections against actual performance is an excellent control tool, which can quickly address problems before they become too serious. Little oversights and mistakes in company projections spread over time can have disastrous consequences. Budget analysis is your protection against that.

Working together, the income statement, cash flow statement, balance sheet, breakeven analysis, and budget analysis provide a complete picture of a company’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 conditions and analyzing past mistakes. Understanding the financial implications of your financial decisions can mean the difference between your company’s success and failure. Perhaps the most important financial is your cash flow statement, but understanding all of these financials and how they work together is key to a company’s success. Estimates are based on assumptions – make sure they are well thought out and as realistic as possible.

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