Financial ratios and performing a financial analysis using your financial statements can be a valuable tool in constructing a successful small business.
Comparing your current financial statements to:
...can tell you how your business is doing financially.
These are just a few of the things you will want to study in your financial analysis.
Pull out those previous financial statements, clear your calendar, get comfortable and plan on spending a few hours analyzing and comparing those previous financial statements with your current ones.
Those of you with a new business can take your pro forma statements (Pro forma financial statements are forecasts of the financial position of a business at some defined point in the future) and perform your financial analysis by asking yourself the following questions:
An industry comparison analysis compares your small business’s performance to other small businesses in your industry.
These are not as easy to do simply because finding the data you need to perform these financial analyses are sometimes a little difficult to find.
However, if you ever need a loan or investors, you can bet they are going to perform some of the following ratio analysis with your financial statements.
So it may be worth a little effort and/or money to get your industry average ratios. I live close to a college and usually I can get a copy of industry averages free from the library there
You might be able to find the same information at your local library. The books you want to look at are the Standard and Poor Industry Averages and the Valuline Surveys.
You can also get a basic financial ratio report in your industry free online from this site: bizminer.com, but you have to pay for a more current detailed report.
Here are a few of the most common financial ratio analyses using your Profit and Loss Statement:
Most financial ratios are calculated using your Balance Sheet.
Here are a few of the most common financial ratio analyses: using your Balance Sheet:
These are just some of the ratios you can use to do a simple financial statement analysis. There are more complex ratios you can use (do a search on financial ratios), but if you have a very small business such as myself you really don’t need the more complex analyses just yet.
So use these and compare how you are doing now to how you were doing and how you compare to others in your industry.
Remember the sky is the limit when it comes to building your business!
Next Section: Lesson 7