The Basics Of Financial Data Analysis
You have a financial statement, but you don’t know how to use it to your best advantage. That’s when it’s time to seek the help of an expert who can analyze the numbers and explain how they can help you make better business decisions.
But first, you can arm yourself with a little basic knowledge. Here are some financial data analysis tips for beginners.
What are “financial statements”, exactly? There are three separate types you’ll want to focus upon: your balance sheet, your income statement and your cash flow statement.
Simply stated, those are ways of keeping score. They tell you how you’re doing, in terms of dollars. That’s why when investors look at buying stock in your company, they want to see that the numbers show you’re not only making money but are likely to continue to do so. They or their stock brokers will do a detailed financial risk analysis before committing to making an investment.
Let’s take a look at the balance sheet first. It’s going to show you three things. You’ll see your assets, your liabilities and your shareholder equity. The total of the last two is supposed to equal the total of the first one. As the name implies, the numbers must be in balance.
The income statement is often referred to as a profit and loss statement, or “PandL”. Your net income is revenue minus expenses. In other words, it’s how much is left after you pay your obligations.
Arguably, the most important of the three financial statements shows you the cash flow. What you’re looking for is the answer to a basic question. Are you generating cash from what you’re doing? Operations that are not don’t last very long. In fact, that was the stated reason for failure of 5.2% of surveyed businesses between 2013 and 2014.
Remember…these are just a few financial data analysis tips for beginners. You can dig deeply into each category and learn a great deal more. And it’s not as complicated to understand as you might think.
But you might be asking yourself how seeking the help of an outside professional can work to your benefit. One answer is that an expert analysis gives you the detailed report you’ll need to seek a loan to expand your business. Prospective lenders want to see real numbers in order to know your past, present and predicted future.
Hopefully, you can use these financial data analysis tips for beginners to gain a better understanding of your operation and become better able to spot any potential problems.
A full 46% of businesses fail due to incompetence, and 25% go under after the first year. In those situations, management doesn’t bother to learn about financing or even proper record-keeping. They often spend too much, fall behind on their taxes and don’t know how to plan for success.