The Importance of Financial Analysis for Business Success

When I think about a business's success, financial analysis immediately comes to mind.  How are business owners reviewing their financials?  Are they using an accounting system or relying on Excel worksheets? 

​It's crucial for small business owners to understand the significance of performing financial analysis.  To grasp the monthly activities of their business, owners should be familiar with the following aspects of financial statement analysis:

Key Elements of Financial Statement Analysis

1. Trends. Identify trends by creating trend lines for key items in the financial statements over multiple periods.  This helps in assessing the company's performance.  Common trend lines include revenues, gross margin, net profits, cash, accounts receivable, and debt.
2. Proportion analysis. Utilize various ratios to understand the relationship between different accounts in the financial statements.  For instance, the quick ratio estimates a company's ability to pay its immediate liabilities, while the debt-to-equity ratio indicates if the company has taken on too much debt.  These analyses often compare revenues and expenses on the income statement with assets, liabilities, and equity on the balance sheet.

The Power of Financial Statement Analysis

Financial statement analysis is an exceptionally powerful tool for various users, each with different objectives in understanding the financial circumstances of a business.

Users of Financial Statement Analysis

• Creditors. Lenders are interested in a company's ability to repay debt, focusing on cash flow measures.
• Investors. Both current and prospective investors examine financial statements to assess a company's ability to issue dividends, generate cash flow, or maintain growth.
• Management. The company controller conducts ongoing analysis of financial results, particularly in relation to operational metrics not visible to outsiders (e.g., cost per delivery, cost per distribution channel, profit by product).
• Regulatory Authorities. For publicly held companies, financial statements are reviewed by the Securities and Exchange Commission (SEC) to ensure compliance with accounting standards and SEC rules.

Ready to take your business to the next level? Discover how our Creative Business Command Center packages can help your business run smoothly and efficiently.  You can start today, email [email protected].

​For many small business owners, extending credit to customers seems like a no-brainer since it can be a great way to attract customers and build profitable long-term relationships with them.
 
Credit is convenient and will probably win customers, but sales revenue will be delayed for either the discount period or the credit period, or perhaps longer if the customer is late in making the payment.
 
Business owners and those responsible for the day to day task should understand that the analysis of receivables method is based on the assumption that the longer an account receivable is outstanding, the less likely that it will be collected.  Accounts receivable constitute the primary source of incoming cash flow for most businesses, so you should analyze these invoices in aggregate to ascertain the health of the underlying cash flows.

The analysis of receivable method is applies as follows:
Step 1:  The due date of each account receivable is determined
Step 2:  The number of days each account is past due is determined.  This is the number of days between the due date of the account and the date of the analysis.
Step 3:  Each account is placed in an aged class according to its days past due which is typically aged as follows:

• Not past due
• 1-30 days past due
• 31-60 days past due
• 61-90 days past due
• 91-180 days past due

Step 4:  The totals for each aged class are determined.
Step 5:  The total for each aged class is multiplied by an estimated percentage of uncollectible accounts for that class
Step 6:  The estimated total of uncollectible accounts is determined as the sum of the uncollectible accounts for each ages class.

The preceding steps include summarizing an aging schedule and this overall process is called aging the receivables.  An example of a business’s aging report is provided below.  

​A detailed process such as accounts receivable should be an extensive documented process for any business.  This process will ensure cash flow is managed appropriately by those responsible.  Fontenot & Associates Solutions LLC can support with the development and analytical process of the monthly accounts receivable, we are just a click away.

Cash doesn’t always flow how you need it to.  It can start from customers who pay late to suppliers who have suffered some setbacks.  Building a cushion in your bank account isn't a complicated concept; instead of having just enough to pay bills and staff, it is time to have a more significant amount in the account.  An amount that will not only allow for timely payments of monthly billings but enough to transfer into savings.  Maintaining a smooth cash flow requires juggling many aspects of the business, such as staying on top of “pending cash,” also known as accounts receivable.

Cash flow is the life of an organization; it’s a means to pay salaries, buy supplies and make stock investments.  As the statistics have shown, owners who cannot efficiently manage their business cash flow are almost certain to fail.  To improve cash flow and sustain growth, it will be important to build a cash cushion.  Cash reserves enable companies to cope with business disruption, deal with seasonality, and manage slow-paying customers.  In addition, it allows a business to take advantage of new opportunities should they arise, and plan for future growth by having investment capital available.

Here are just a few tips on how business owners can boost their cash flow:

• Avoid Surprises:  Anticipate future needs instead of searching for cash when you are desperate.  Review your balance sheet at least quarterly to calculate available cash which can also help your business’s financial health on any given day.

 

• Build Connections with Lenders:  Building connections in the financial community before you need their help may increase the chances of a business owner being able to secure a loan.

 

• Balance your client base:  Many services professional companies – such as real estate management firms, PR agencies, accountants, and attorneys, they work with certain clients on a project-by-project basis.  These management of services leaves open a door of opportunity to convert some of these clients to a retainer relationship, where they pay you a set amount of money per month for a certain number of services.

 

• Develop methods to increase cashflow:  There are a number of ways to consider when building your cash flow.  Start with requiring a security deposit equal to 50% of the order.  Another option is layaway programs, allowing customers to select a specific program or product that is then reserved for future payments and delivered when payment has been completed.

 
The efforts to implement meaningful business changes will be a combination of lessons learned.  Building and keeping an adequate accumulation of cash provides maximum opportunity and flexibility to any business.
 
Fontenot & Associates Solutions, LLC recommends identifying the method or strategies which work for your business culture.  Building a stable long-term business means having sufficient liquidity and a developed and executed form of policy and procedures with clarity defined goals.

Are you a small business planning to offer benefits to your current staff or new employees?  Since small businesses often don’t have big budgets to compete with bigger companies on salary, offering employee perks is one way to help bridge the gap, boost morale and improve employee retention rates.
 
Many experts and entrepreneurs have identified some of the best perks that small businesses can offer employees.

1. Educate Them:  There are many perks employers can offer, but one that may fall into the favorite category is tuition reimbursement.  Not only can tuition reimbursement lead to happier employees, but it can also attract higher-quality employees. 
2. Free Food:  While you don’t need an in-house chef, a well-stocked snack pantry and quality     coffee maker can go a lot further than you think.  And, try to veer on the healthier side – you don’t want your team crashing on sugar. 
3. Listening to Employee Needs:  Whether your company is big or small, you need to listen to employee needs and understand the personal challenges they face to do their job well.  Voluntary benefits such as Legal Shield and Legal Estate are benefits that not only can protect their family under stress and future savings.
4. Show Appreciation:  Since most talented employees leave because they don’t feel appreciated, take steps to ensure your best people know how much the company values them.  This is a value can be added by dedicating space in newsletter for employee of the month and planning for team building events. 
5. Health Care: As a small business owner, you have options to offering healthcare for employees or at least providing a resource to delivering the information and tools for registering.  Employers have reimbursement programs and it also creates a tax-deductible expense for the employer.
6. Rewarding Employees with Money:  Small business owners can provide employees with a reimbursement program option.  This allows the employees to use the funds for family day to day expenses or medical. 

Motivating employees with perks doesn’t have to cost a fortune.  What small businesses may lack in corporate advantages; they gain in more closely-knit team.  Fontenot Solutions offers attractive perk solutions