Financial statement analysis is reviewing or analyzing a business’s financial statements, which includes: the balance sheet, profit and loss statement (P&L), and cash flow statement. A business financial statement tells you where the business is making money from, what it was spent on, and where your cash levels are at right now.
In this article we’re going to briefly look at all the aspects of a business financial statement, and the process of financial statement analysis.
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What’s in a Business Financial Statement?
A business’s financial statement typically consists of three different individual statements:
- Balance Sheet
- Income Statement
- Cash Flow Statement
For a nice look at what each of these individual financial statements are, and what they’re used for, let’s take a look at an infographic provided by Business Backer:
Financial Statement Analysis
So what can I learn from all of these documents? All of this data, typically over many years, can tell analysts how successful a company is. It can tell you what the struggles of the business are, and what time of year you’re likely to struggle. They are widely used by investors to understand how risky a business is to put money into.
Financial statement analysis is typically done in three different ways:
This is industry analysis that shows you where your business is compared to the rest of the industry. Without proper financial documents, it’s difficult to know for sure how you stack up against the competition. Top line sales don’t tell you the whole story.
- Trend Analysis:
This gives you a good picture as to how the business is performing over a period of time, or during certain time periods each year. This is vital to understanding what financing needs you may have if you’re business is more seasonal than you think it is.
- Common Size Financial Analysis:
This is a percentage of sales analysis that dives into the income statement and balance sheet, showing the true value of each line item to the overall business. This is very handy to keep certain expenses under control, like labor.
The Smart Hack
Doing regular financial statement analysis is healthy for your business. Once you understand your balance sheet, income statement, and cash flow statement, then you’d better be able to manage the day to day needs of the business. These financial documents will point out your strengths and weaknesses to help you know where to spend your time and attention.
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