Business MetricsMetrics

Metrics to Analyze Financial Statements: Learn & Implement

Financial statements can narrate the ugly truth of an organization. These documents showcase the real picture of a company and urge the need to plan and 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. Thus, it is essential to learn about diverse metrics, analyze the financial statements, and observe the insights.

An Overview

The financial analysis contains the past, present, and future data of the financial transaction of a venture including the operating expenses. To gain real insight into the financial situation, the business owners must consult their accountants or trusted financial advisers. Whereas, it is the duty of financial advisers to focus on key financial analyses to improve the ROI and overall business turnover. Here is a list to refer:

  • Ratio Analysis: It is a method of analyzing the data in the financial statement of a company. The metric offers insight into the relationships between 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 real-time inventory turnover rate of the company indicates the speed of sale of the inventories. A slow turnover rate indicates excessive stock levels that have excess money tied-up in the inventories. The foremost trouble arises when inventory levels are not enough to fulfill the customer orders on time.
  • Collection Period: It is crucial 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 staying 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 dollar sales 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 profit margins of the company amid sales growth periods to ensure if they are keeping pace. If not, consider reviewing your overhead and other expenses.

Click on the following link to read the original article: https://www.lewis-knopf.com/financial-sense-blog/key-financial-analysis-metrics-for-your-business/

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