Understanding and assessing your company’s financial situation is an essential aspect of effective business management. Working capital is a crucial aspect, which provides you with a clear picture of your business’s financial situation. Now, the question arises: How to determine the financial health of a company? The answer is that you need to understand your financial statements, which contain the records of the financial activities of a company. The income statement, cash flow statement and balance sheet are the three financial documents you will need to check and enhance the financial condition of a company. Small business accountants in Melbourne can help you analyse the financial status of your company.
Importance of understanding the financial health of a company
The financial status is not just helpful for investors but a crucial aspect that ensures the company’s long-term growth and sustainability. If you know where your company stands in terms of finances, then it can provide a clear picture of operational efficiencies, warning signs of trouble, and possible areas for investment.
How to analyse the financial status of a company?
Financial analysis is crucial for any growing business. It gives you an insight into operational efficiency and long-term growth. The following are crucial factors in determining the financial status of a company:
- Analyse the balance sheet
Why do we need to analyse the balance sheet? A balance sheet acts as a financial snapshot of a company that reveals a company’s liabilities, assets, and owner’s equity. Assets are the resources used to conduct a company’s operations, while liabilities are borrowed funds. Owner’s equity shows the investment owners – be they public stakeholders or private individuals – have made in the business. Currently balance sheet follows the accounting equation: assets = liabilities+owner’s equity. Assets and liabilities fall under current or non-current, which indicates their short or long-term nature.
- Analyse the income statement
In the next step, the income statement is analysed. The income statement helps in spotting a company’s revenue, profitability, and expenses over a specific period. To create this, a trial balance of financial transactions from any two points is used. An income statement is easy to create. It starts with counting the revenue earned by a company during a defined time period. After that, it subtracts the cost of sold products to check the gross profit. Financial analysis is important for tax purposes as it can be used by a tax return accountant at the time of preparing and filing taxes. A profit and loss statement gives an insight into a company’s financial status and helps us understand how your business is doing.
Analyse the cash flow statement
A cash flow statement helps in determining the usage of cash by a company in a certain time period. A cash flow statement not only helps in representing the source of cash flow but also shows where the money was used. The cash flow statement divides cash movement into three main categories, such as investing, operations, and financing activities. First of all, it monitors the source of cash flow, such as investments and revenue. After that, it checks where that money is used, whether on purchasing new equipment, day-to-day operations, or paying off debts.
- Financial ratio analysis
Financial ratio is an essential tool in determining the financial status of a company. These metrics fall under different categories, such as liquidity, profitability, efficiency, solvency, and valuation, and provide insights into various aspects of company performance. Here are key financial ratios:
- Gross profit margin
- Net profit margin
- Coverage ratio
- Current ratio
- Quick ratio
- Debt-to-Equity ratio
- Inventory turnover
- Total asset turnover
- Return on equity
- Return on assets
To keep a record of everything, bookkeeping for small businesses is crucial. Bookkeepers can help you record and maintain financial data that can be used by an accountant. No single statement can help you understand the financial health of your company. Therefore, it’s crucial to maintain all three financial statements to determine the financial status of your company.
Conclusion
Professional accountants can help you understand the financial condition of your company. You can ask Reliable Melbourne Accountants to assess your company’s financial status so you can make improvements accordingly.