Every business company should consider preparing its financial reports with accuracy for knowing the profits and losses in detail. A financial statement allows businesses to examine their performance levels after examining the past and current data. Another thing is that it gives ways to understand more about assets, liabilities, expenditure, reserves, income, cash flow, and other things. Businesses can even evaluate the strengths and weaknesses of their economic conditions after preparing a financial statement that can help make a better decision. The statement has three main areas the structure, economic characteristics, and strategies.
Businesses should consider the following things while performing a financial analysis.
1. Ratios
Ratio is the most important thing to consider when conducting a financial analysis. There are different types of ratios followed in the analysis that can help focus more on the objectives while preparing a financial statement of a company. Some of them include efficiency ratios, liquidity ratios, solvency ratios, and profitability ratios. The common efficiency ratios include inventory turnover, asset turnover, accounts payable turnover, and accounts receivable turnover. A liquidity ratio is a ratio that allows a company to determine whether it is able to pay short-term debts or not.
Some of the common liquidity ratios include the current ratio, quick ratio, and cash ratio. A solvency ratio enables a business to determine its ability to pay long-term obligations. The common solvency ratios include debt to equity and debt to assets. A profitable ratio is the measurement of profits that allows a company to earn a high income. The most used profitable ratios are return on assets and return on equity.
2. Horizontal analysis
A horizontal analysis involves comparing the current year performance of a business with the performance of previous years. It is usually done with the income statements and balance sheets that can help come to a conclusion. In addition, it allows businesses to get more ideas about the changes in detail for making a decision accordingly.
3. Vertical analysis
Vertical analysis is very simple than horizontal analysis because it allows businesses to reveal the outcomes after studying the income statement and balance sheet. It plays a significant role in financial statement preparation to achieve optimal results. An income statement allows a business to have a look at the margins, expenses and cost of goods sold. The details provided by the balance sheet let businesses to notify the changes after evaluating three important categories such as assets, equities, and liabilities.
