If someone were to ask you about your company’s financial strengths and weaknesses, could you give them a detailed answer?
As a founder, you need to know this type of information about your business. Understanding your financial performance is key to making better decisions about growth and investment plans.
The key to painting that picture lies in a process known as financial analysis.
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Your balance sheets give you a snapshot of your company’s finances at a given point in time, such as the end of a fiscal year. On this sheet, you’ll see the value of your short- and long-term assets, debts, and owner’s equity.
Look at your balance sheets and consider the following questions:
Also known as a profit and loss (P&L) statement, the income statement provides insight into your company’s revenue, expenses, and profits.
Evaluate your income statements and look for trends in your:
Startups can often take two to three years to become profitable. That’s why it’s helpful to track several financial metrics.
For example, you can have a net loss while still generating an operating profit. This means your core business is profitable, but you may still be paying off interest on the loans it took to get the business off the ground.
Your cash flow statements give you insight into how money flows in and out of your business by looking at your expenses and which activities generate income.
Here are some steps to take in your cash flow analysis:
Calculate financial ratios to get a more detailed picture of your company’s profitability, liquidity, and overall operational efficiency. Here are some of the most common metrics to consider in a ratio analysis.
Put together all your findings. You can use the following prompts to help organize your analysis:
After you conduct your analysis, you’ll know where your business stands in terms of its finances and be able to have educated discussions with stakeholders and potential investors.
Furthermore, you’ll be able to use this knowledge to make more informed decisions about your business’s strategy.
Gaurav Nagani, CEO of help desk software company Desku.io, recommends conducting an analysis “before investing, at regular intervals, before making strategic decisions, and during difficult times.” This way, when you have to make impactful decisions, you’re doing so with a full picture of your company’s financial health.
Manage your business and personal finances with these five financial planning templates.
