Do you know how well your company is performing?
Financial trends say a lot about a company. To understand how well your company is performing, it is essential to conduct a financial statement analysis to ensure that your company is operating and progressing smoothly.
As the chief financial officer of a company, a major task that’s essential for you to complete is a financial statement analysis. Analyzing financial statements is essential to ensure that your company is not hemorrhaging money and that your company is on the right track. Financial statements say a lot about a company and having the proper objectives in mind before you begin your financial statement analysis project is important. So, what exactly are the best objectives of a financial statement analysis that you should be looking to achieve?
One thing, as the CFO of your company, that you should be looking at when you conduct your analysis, is the sales of your company. It is important to understand if your company’s sales are dropping, growing, or just moving sideways. The way sales are moving will say a lot about your company. Even if your company isn’t as big as others in your field, it’s better if you have steady growth than if your sales aren’t improving at all.
Revenue per Employee
When it comes to financial reporting and analysis, a great way to understand the maturity of your company and if it is operating as best it could is to calculate the revenue of each full-time employee. To calculate this, divide the company’s revenue by the number of full-time employees. You’ll know your company is moving in the right direction if the number you come up with is moving positively.
Another objective that is beneficial to have when conducting your financial analysis is to understand your company’s profit and gross margins. Gross margins are critical to income statements, but they can be hard to manage and maintain, especially during turbulent economic times. It is essential to properly maintain gross margins or else profit margins will not be positive. It is important to understand that the smaller your company’s gross margins are, the less room for error and the more your company’s CEO must watch things like selling and general costs. When it comes to analyzing your company’s profit margins, obviously, it’s important for them to represent a positive trend.
Return on Equity (ROE) and return on assets are two other objectives you should have when starting your financial statement analysis project. Oftentimes, ROE statements can be very misleading, especially if your CEO has made internal financials match the tax numbers to satisfy his tax accountant. Also, an excessive growth rate in debt can drive ROE to increase so it is important to properly look at the numbers to understand if your company truly has an increasing ROE. When it comes to reviewing the return on assets of your company, they will always be lower than ROE, but they shouldn’t be too small. If they are, this could mean many things, but it most likely means your company is holding excess or dead inventory.
One of the most important objectives of a financial statement analysis is understanding how cash is flowing in your business. It is essential to understand how operating cash flow is turning into profits. This means comparing operating cash flow to earnings or profits before taxes. This comparison should be a high percentage but don’t get discouraged if it’s not at 100%. Unless you’re operating a cash business like a fast food joint, you will most likely never get to a perfect 100% but you should get as close as possible.
Free cash flow is another objective to look at when you’re conducting your financial statement analysis. Free cash flow is defined as operating cash flow minus capital expenditures. When calculating this, your outcome should be expressed as a percentage. If your outcome is a high percentage, this means owners of your company can pay down some of their debt or even just pull money out of the company.