It's important to track and analyse your business's financial performance to make sure your business is running efficiently. Knowing exactly where you spend and earn money could help you identify problems early, find time and cost savings, and improve how you run your business. Show Read about the key outcomes you should be tracking to make sure your business is running smoothly.
A key performance indicator (KPI) is a performance measure that can be benchmarked internally against your progress over time or against your industry sector peers and will help you focus on achieving your business goals. Effective KPIs:
Establishing effective KPIsEffective KPIs can be:
The easiest KPIs to establish for your business are financial ratios that can be calculated from your business financial statements. Any KPI you develop should follow the 'SMART' acronym:
Understanding financial ratiosA ratio is a means of comparing one number to another. Ratios containing 1 or more financial figures is called a 'financial ratio'. You can use ratios to simplify financial data to monitor and improve your business performance. Use ratios to:
There are a range of ratios available to use but the most important, and most common, financial ratios are explained in our quick reference ratios infographic (JPG, 490KB). Use our ratio calculators to help assess your business’s profitability, liquidity, operating efficiency and leverage. Using ratios in your businessIn financial analysis, ratios may be expressed as the ratio, rate or percentage, depending on your preference. To provide useful meaning, financial ratios need to be compared with, for example:
Learn more about key financial measures and ratios. Talk to your financial adviser for recommendations on the most suitable ratios for your business. They will also be able to show you how to produce reports to calculate and monitor them. Ratios and benchmarkingWhen you start to analyse the figures from your financial ratios, you can use them to benchmark your business. This will help you assess how your business is performing by comparing it to other businesses in your industry. You can use this information to improve the financial performance of your business. Business and industry associations often collect financial data and make it available online. Non-financial ratiosNon-financial ratios can also be important to highlight issues that may not show up on financial records. This could include problems with staff turnover, client dissatisfaction or inefficient use of resources such as material inputs. Learn more about non-financial ratios. Also consider...
According to Accounting Tools, financial statement analysis involves reviewing the financial statements of an organization to gain an understanding of its financial situation. Financial statements usually include a balance sheet, income statement, statement of cash flows and supplementary notes. An internal analysis is conducted by employees, executives, government agencies or other individuals with access to a business firm’s internal accounting records. In contrast, an external analysis is conducted by outsiders with access to published financial statements. These outsiders may include creditors, investors, credit agencies, government agencies or the general public. Either a short- or long-term analysis can be conducted. While a short-term analysis considers a firm’s ability to pay short-term debts, or liquidity, a long-term analysis considers a firm’s ability to pay long-term debts, or solvency. Tools and techniques used in financial analysis include cash flow analysis, common-size statement analysis, comparative statement analysis, cost-volume-profit analysis, fund flow analysis, networking capital analysis and trend analysis. Methods of Financial Statement AnalysisFinancial statement analysis can be conducted using either horizontal and vertical analysis, or analysis that uses ratios. Horizontal analysis involves comparing financial information over a series of reported periods, with a base year being chosen as a starting point for future comparison. Vertical analysis involves a proportional analysis of a financial statement. Every line item is listed as a percentage of another line item, with a base year being chosen to compare figures of the same year’s statement. Instead of being used as an alternative to horizontal analysis, vertical analysis is used alongside it. Analysis using ratios is used to calculate the relative size of one figure in relation to another, which can then be compared to the ratio for a prior period. This method of conducting financial statement analysis includes the following categories of ratios:
Benefits of Accurate Financial Statement AnalysisFinancial statement analysis is crucial for complying with business laws and regulations, while also meeting the needs of stakeholders and various other parties. But in order to conduct accurate financial statement analysis, developing skills and intuition is as important as following best accounting practices. Financial statement analysis can benefit organizations in numerous ways. It provides internal and external stakeholders with the opportunity to make informed decisions regarding investing. Financial statement analysis also provides lending institutions with an unbiased view of a business’s financial health, which is helpful for making lending decisions. And as top executives and others in management rely on accounting to provide an accurate depiction of the effects of their decisions, financial statement analysis helps with matters of corporate governance as well. Follow these tips for conducting accurate financial statement analysis:
Business growth depends on the accurate and timely analysis of financial statements. While the rapid pace of business today is placing more importance on insights gathered by accountants, developing knowledge is still an essential aspect of growing a business. For professionals interested in a career that can make a significant impact on businesses, investors and consumers, pursuing a master’s degree in accounting could be an especially worthwhile endeavor. |