Financial statements can be a valuable source of information for business owners, and these statements could help identify important trends.
Analyze Financial Statements in Depth
Wall Street analysts spend a great deal of time reviewing the financial statements of publicly traded companies in an effort to determine the potential value of that company. They often begin with the income statement, but their analysis includes all of the financial statements. They also usually complete a review of the statements from the past several years. Many analysts will calculate trends of the different data series available in financial statements, because the direction of the trend will provide additional insight into their analysis.
The goal of an analyst is to find information that will help them to make investment decisions. Business owners can follow a similar process to find information that will help them make business decisions.
A Simple Example
One way to use financial statement analysis would be to find the underlying cause of a drop in profits. Declines in profits could result from a decrease in sales, an increase in expenses, or a combination of those two factors. Comparing a current financial statement to previous statements would allow a business owner to spot any changes in the numbers. A ratio analysis would be needed to understand if the changes in the numbers were significant, an important step towards identifying the underlying problem.
If expenses have increased faster than sales, the business owner might be able to pass on the higher prices to customers. Analyzing financial statements in detail after the price hike would show the owner if that decision has restored the company’s profits, or whether it has made the situation worse because customers have reduced their orders.
Financial statement analysis is a complex task, but even a simple approach to the problem could benefit a business owner. SCORE, a nonprofit group dedicated to helping small businesses succeed, has an introduction to financial analysis available for free on their website.