Making decisions with financial statements

Making decisions with financial statements

As an entrepreneur, how do you effectively assess ongoing operations? How do you know you are truly profitable? Looking beyond the numbers in your financial software, is fundamental for growth and development. In other words, you need to know how to evaluate the data in your financial software to draw out meaningful conclusions. This is known as financial analysis.

What is Financial Analysis?

Financial analysis is the process of evaluating businesses, projects, budgets and other finance-related activities to determine their performance and suitability. Typically, financial analysis is used to analyze whether an entity is stable, solvent, liquid or profitable.

Financial analysis is a fundamental aspect of business. It looks at verifiable financial data to pick up data about the present and future financial wellbeing of an organization. When financial analysis is done right, a solid understanding of business operations emerges.

Your financial software and financial analysis

Financial software is great at capturing financial data but they do not tell you what’s going on behind the numbers. Having external tracking systems give more insight than simply looking at your financial data. They also make it easier to verify the numbers in the financial software are accurate. For example, if you have multiple subscriptions that automatically hits your account, it will be sensible to keep track of subscriptions outside your financial software using a spreadsheet. You can update this spreadsheet whenever you have a new subscription or cancel an old one. That way you have a bird’s eye view of what is going on with your subscriptions. This is important as this is one expense that easily gets out of control.

Even when financial records exist, problems like having too many categories, misclassification of transactions, untimely record keeping, etc, makes financial data difficult to use. You look at your financial record and have a hard time putting the data to good use. As a CPA, it is not uncommon for financial software to spill out non-useable data. Like the saying goes, garbage in, garbage out. When the financial software spills out unusable data, this problem will need to be fixed before any type of analysis is done. It is dangerous to do analysis with bad data as you could potentially make really bad decisions.

If you have bad data, creating a comprehensive budget that is integrated into your financial software helps keep better track of the numbers in your business. With a budget, it is easier to see when a number is out of line and when further investigation is needed.

Making financial data more useful

One way to make financial data more useful, is to use external analysis tools like excel templates. Excel templates like ‘The Simple Path to Understanding your Numbers like a Pro’ help condense financial data so the owner of the business can clearly see what is going on. This excel template includes an eBook with link to videos which gives more insight to the entrepreneur. You can be on your way to getting better insight of your business in seven simple exercises

Making decisions with financial statements is a skill that improves with practice. Your financial software (while a very good start) is often insufficient in giving all the data needed to make prudent decisions. Problems like lack of ratios and too many account categories make it difficult for the human mind to make sense of the data.

 

Unclear numbers make it hard to make prudent business decisions. Keeping your numbers in check with ratios is one way to make sure no particular expense runs out of line. External tools come in very handy in making better sense of your numbers. Knowing the story your financial statement is telling will give you the confidence to strategically grow your business: You understand the risks behind your decisions and how to better manage those risks.

By | 2018-07-21T19:09:46+00:00 July 21st, 2018|Finance|Comments Off on Making decisions with financial statements

About the Author:

With over 16 years of accounting and finance experience, I know what it takes to make your business profitable. However, in my opinion of what really makes me qualified to work with you is my love for using my God-given gift to help people with numbers. I love difficult problems and my business is to be in the business of helping other people achieve their dream/vision/ goal in the most cost effective and productive way. I am very passionate about my clients and take their problems very personally.