Financial analysis is the next logical outgrowth for small business owners of mastering bookkeeping skills and learning how to read financial statements... Now you're going to actually USE all that info!
Careful analysis of financial indicators is the key to tracking your business's performance and getting a fix on how things are going.
Components of Your Analysis
There are 10 main areas you'll want to analyze closely:
Tracking — Which financial information you need to track.
Return on investment (ROI) — Compare your net profit / shareholder equity against industry norms.
Return on assets — Look at net profit and value of assets in comparison to industry norms.
Asset turnover — Compare your sales with the value of your assets and against industry norms.
Working capital — A liquidity indicator, determined by dividing current assets by current liabilities... How do you stack up against your competitors?
Quick ratio / Acid test ratio — Look at your current assets-inventory to current liabilities and then compare yourself to industry norms.
Inventory turnover — You get this by dividing cost of goods sold by average inventory. Are you on track?
Receivables turnover — Use net sales, average accounts receivable, and receivables turnover to determine this ratio.
Average days payable — How long does it take you to pay your bills and how do you compare to other businesses in your field?
Debt to equity ratio — Total liabilities divided by shareholders' equity + retained earnings will give you this stability indicator number.
It's important to use each of these indicators in your financial analysis, as a small business owner. It's not just about doing financial statements... you have to use them too!
Additional information on financial forecasting and the other important aspects of business finance is available in the Business Buffet 5-in-1 video program: Financial Forecast, How to Read Financial Statements, Financial Analysis, Cash Flow Forecast and Bookkeeping. Check out Business Buffet here
Additional information on financial forecasting and the other important aspects of business finance is available in the Business Buffet 5-in-1 video program: Financial Forecast, How to Read Financial Statements, Financial Analysis, Cash Flow Forecast and Bookkeeping. 
