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Better Business Idea #7

Financial Analysis--Reading The Vital Signs Of Your Business

Many closely held businesses don't give sufficient attention to good financial management. The principal reason is probably that the owner is too involved with day-to-day fire-fighting and the bookkeeper is focused on accumulating accounting information, collecting accounts receivable and paying bills. No one is involved with ongoing financial analysis to interpret how the business is doing and how it can be improved.

More and more CPAs are helping their clients on a regular basis, monthly or quarterly, to understand and improve the performance of their clients' businesses.

The financial statements--balance sheet, income statement, and cash flow statement--include information that indicate trends in the health of the business, especially when they are studied on a comparative basis from month to month and from year to year.

Financial ratios are tools that can be used to help make sense of the financial statements by reading the "pulse" and "temperature" or vital signs of the business. The ratios of the company may be compared from period to period to determine trends. The ratios may also be compared to industry statistics or a "best of industry" performer for a "benchmarking" comparison. If the business management discovers that a ratio is on a negative trend or is not a good benchmark, strategies may be developed and implemented to improve the ratio.

Here are a few of the vital statistics that a business owner should watch:

Are you studying these statistics in your company on a regular basis? If you aren't, maybe it would be worthwhile to invest in a business monitoring and improvement service. Please give us a call to discuss the details.

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Michael Gray, CPA
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