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Importance of Business Financial Analysis and Management

Business Financial Analysis

Planning and Control are the two most important components of a Successful Business. A Business Plan draws most of the Forecasting work from Business Strategy and Control through robust Financial analysis. Financial Data provides a way to measure where you are in your Strategic Plan and tells you where changes are needed in your Plan. That’s why Financial Data Analysis and Management is vital to running a successful business.

Setting up a proper Accounting System throughout your business is extremely important, so data collection is easy. You cannot manage your Business for Profitability without a good Accounting System. A good Accountant is invaluable in helping to capture Financial Data.

By having a Financial Management system, you can easily spot early warning signs or spot particularly profitable areas. Not having a system to analyze and organize Financial Data makes it impossible to effectively manage, grow and control a business. It makes it impossible to measure the success (or lack thereof) of your Planning and Strategy. Moreover, if misused, erroneous Financial Data can be disastrous for a company’s livelihood.

An Accounting and Financial Management System is only as useful as it is used systematically across the entire business. It is extremely important to apply the system to the structure of the business and to use it systematically. Accounting System is a reflection of the health or lack of a business and business decisions are made. Make sure you set it up correctly, train your staff on it, and most importantly use it!

The two main goals of any business is to be Profitable and to have Cash Flow to pay off liabilities. Income Statement and Cash Flow Statement stand out in this area. The Income Statement shows how well a Company is doing and the Statement of Cash Flows shows how well a business is managing its Cash. Profit or Loss on one side and Liquidity on the other.

The trick is to find a good balance between Profits and Liquidity which can be very difficult to maintain if not well planned. Rapid Growth with high profits can drain a business’s liquidity, so Being Profitable is not a guarantee of staying in business. The role of the current and projected Cash Flow and Income Statement is to help you identify problem areas. So you can effectively plan for these, such as raising more capital, raising more equity, or obtaining financing. What’s more, these two statements help you identify areas that can be better controlled and managed, eliminating the need for additional capital and financing.

Budget Analysis compares a Company’s Actual Performance with Projected Performance on a Monthly, Quarterly and Annually. The budget is a great tool to guard against excessive, unreduced spending and is closely linked to the Strategic Goals the company has set. Analyzing Income Statement and Cash Flow Statement forecasts against Actual Performance is an excellent control tool that can quickly solve problems before they become too serious. Minor oversight and errors in a Company’s projections over Time can have a disastrous effect. Budget Analysis is your protection against this.

Working through an Interactive Accounting System can be a very useful tool in identifying future business scenarios and analyzing past errors. Understanding the financial implications of your financial decisions can mean the difference between your company’s success and failure. Probably the most important finance is your Cash Flow Statement, but understanding all these financials and how they work together is key to a company’s success. Insights are based on assumptions – you have to make sure they are well thought out and as realistic as possible.

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