Keeping a close eye on your small business’ financials is essential in planning a small business strategy. Here are the crucial steps to do just that.
Every small business should pay attention to its current financial state. It can be of immeasurable value for future business ventures and financial projections. Not to mention serve as an orientation point when deciding on the direction in which your small business will move.
Proper financial analysis is complex and requires a level of understanding of the relevant information. But if you approach the task with care and attention by following the steps below, you will manage to get a clear picture of your small business’ financial position.
Step #1. Analyze the Value Chain
The value chain is a process that identifies activities related to the creation, manufacturing, and distribution of your product/service. This process also involves a thorough examination of the internal activities to determine which are the most valuable and which need improvements.
Reviewing individual steps and their costs will give you valuable insight into the basic expenses of making your product/service ready and available for sale.
Step #2. Review Financial Statements
When you review the financial statements, it is important to understand the vital components and terms. Here are some brief explanations of what you might see in your financial information:
- The balance sheet will usually be your main focal point. This statement presents assets and liabilities, as well as equity, on an annual basis.
- Under assets and liabilities, you will encounter both current, expected to last for less than 12 months, and non-current, which will last for more than a year.
- Dividing total assets by total liabilities will give you the current ratio, which is a reliable way to assess your small business’ ability to fulfil all ongoing obligations.
- Subtracting liabilities from assets produces the book value, which expresses the shareholder capital and company profits.
Step #3. Measure Risk and Potential Profit
Once you get a firm grip on your financial statement, you should examine how profitable your business is now and compare that to your small business’ assets and equity.
Doing so will help you understand how well your small business can deal with the market's risks and challenges.
The crucial aspect of this step is comparison – you will need to look at current data concerning past numbers, as well as to the competitors and marketplace averages.
Step #4. Create a Forecast
To make the most out of the analysis, you should use the gathered information to create a financial forecast. The forecast will be based on your assumptions about how your small business will grow and the market situation in the foreseeable future.
When you build a forecasted statement, it will be a valuable tool for detecting areas of your small business that could be improved. It will also prepare you for challenges that might lie ahead.
Analyze, Plan, and React
Dealing with the challenging task of financial analysis should not be an isolated effort. The point of developing a thorough understanding of the financials is to formulate a strategy and execute it efficiently.
Cut down the costs, prepare a precise plan of action, and be ready to push your small business in the right direction.