Financial statements can narrate the ugly truth of a company that business owners fear studying. These documents can reveal the real insights of a company and encourage the owners to form strategies to improve the overall turnover.
In this article at Lewis-Knopf.com, the author explains that financial analysis has many benefits like improved profitability and better cash flow to higher overall value. Therefore, it is essential for the business owners to learn about diverse metrics for analyzing the financial statements and observe the insights they can reveal.
The financial analysis must contain the data for financing a venture at present, the future growth needs, and an estimation of operating expenses. As of the structured, in-depth financial data required, the business owners must consult their accountants or other trusted financial advisers. The finance advisers must focus on these key financial analyses to improve the RoI and overall turnover of the business:
- Ratio Analysis: It is a method of analyzing the data contained in the company’s financial statements. The metric offers insight into the relationships between the various items on the financial statements by calculating various ratios first and then comparing them with the company’s past results, projections, and goals. The ratio analysis helps in highlighting the key trends, the company’s current position in the market, and identifying strengths and weaknesses.
- Inventory Turnover Rate: The present inventory turnover rate of the company indicates the speed of sale of the inventories. Sometimes, a relatively slow turnover rate indicates excessive stock levels that have excess money tied-up in the inventories. Resulting in, unavailability of the inventories for other purposes. On the other hand, a slow turnover rate indicates that inventories are simply not moving that may lead to a slow cash flow. However, the major problems arise when inventory levels are not enough to fulfill customer orders on time.
- Collection Period: It is essential to have an idea of the company’s average collection period to make strategic planning easier. It is a standard practice for companies to extend credit to their customers. Those who do so must be on top of all outstanding accounts. But, ensure that you are not driving away potential customers with strict credit and collection policies.
- Net Profit Margin: It is a measure of the fraction of each sales dollar that represents a profit margin after all expenses are included in the account. The true measure of success is whether your additional revenues lead to greater profits or not. Pay close attention to the company’s profit margins in the midst of sales growth periods to ensure if they are keeping pace. If not, consider reviewing your overhead and other expenses.
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