Financial statement analysis is an essential process for any entrepreneur who wants to better understand their business and make more informed decisions.
"The essence of financial reporting is to enable an assessment of a company's real prospects. Without analyzing the numbers, you cannot make a rational assumption about the future."
Charlie Munger
Financial statements help to see how profitable a company is, how effectively it uses resources, and what risks exist.
In this guide, we outline the key steps for analyzing financial indicators and explain how this information can be used to improve business management.
Key financial statements
Financial statements include the following main documents:
Balance sheet: Reflects the company’s assets, liabilities, and shareholders' equity. This report allows you to assess how stable the company is and whether it can meet its obligations.
Income statement: Shows revenues, expenses, and net profit over a specific period. It demonstrates the company’s profitability and identifies the primary sources of income.
Cash flow statement: Reflects the cash movement within the company—where the money comes from and how it is spent. This report helps understand whether the company has enough cash to meet its current obligations.
Statement of changes in equity: Reflects changes in the company’s equity over a specific period, including profits, losses, additional investments, and dividend distributions. It helps understand how the company’s equity structure is changing.
Key steps for financial statement analysis
Below are the primary steps for understanding and analyzing financial statements:
- Balance sheet analysis. Assess assets, liabilities, and shareholders' equity to understand the company's stability and ability to repay its debts.
- Income statement analysis: Check revenues, expenses, and net profit to assess the profitability and efficiency of the company.
- Liquidity analysis. Calculate the current ratio to determine if the company can meet its short-term obligations.
- Profitability evaluation: Calculate the profitability of sales and assets to determine how effectively the company uses its resources.
- Debt analysis. Check the debt ratio to understand the level of debt burden and the risks associated with borrowed funds.
- Assessing the effectiveness of asset management. Assess the efficiency of inventory, accounts receivable, and fixed asset management.
We conduct a comprehensive analysis of your financial statements to enhance transparency, reliability, and efficiency for your business.
Key financial ratios
Financial ratios are used for more precise analysis and help quickly assess the company’s condition and make decisions.
Current ratio shows if the company can meet its short-term obligations. It is calculated as the ratio of current assets to current liabilities. A value above 2 is a good sign.
Profit margin shows what portion of income constitutes profit. It is calculated as the ratio of gross profit to revenue. This ratio helps understand how much profit the company earns per unit of currency.
Debt ratio indicates how much borrowed capital the company uses. A high ratio may indicate that the business is overly dependent on debt, which increases risks.
Profit margin shows what portion of income constitutes profit. It is calculated as the ratio of gross profit to revenue. This ratio helps understand how much profit the company earns per unit of currency.
Debt ratio indicates how much borrowed capital the company uses. A high ratio may indicate that the business is overly dependent on debt, which increases risks.
How to use analysis results for business management
Financial statement analysis is a tool for assessing the company's current state and enables necessary measures for improvement based on the results.
- Cost optimization. Cost analysis helps identify areas where expenses can be reduced without harming the business. This could include reducing production, rent, or marketing expenses.
- Cash flow management. If there are liquidity issues, review the policies for working with clients and suppliers, improve payment terms, or shorten payment collection periods. This ensures stable cash flows and allows the company to meet its obligations on time.
- Enhanced debt control. A high debt ratio may indicate excessive financial burden. In this case, develop a debt reduction strategy, such as increasing equity or optimizing cash flows.
- Identifying growth directions. Use profitability analysis to identify the most successful business areas. Increase investments in segments that bring the highest profits, and reconsider activities in less profitable areas.
- Increasing profitability. Profitability analysis reveals opportunities for increased profitability. This may include adjusting pricing policies, improving operational efficiency, or enhancing product quality.
Regularly using analysis results helps make business management more deliberate and effective, minimize risks, and find new growth opportunities.
Financial statements are your primary tool for business management. They show where the issues lie, which areas need improvement, and which ones generate the most revenue. Understanding the main financial documents and indicators enables you to make more balanced and well-informed decisions.