Blog: How to Use Financial Analysis to Accelerate Your BusinessApril 28th, 2016
Every business maintains financial records to pay corporate taxes, but wouldn’t it be nice if your accounting records could increase your business’ profits? Analytics is the process of analyzing data and information to discover meaningful performance patterns to describe your business processes, predict your future results or improve your operations and it is a powerful tool.
Financial statement analysis
You can use financial statement analysis to monitor and adjust the performance of your business. Analysis can be performed to understand:
- How often your inventory turns over, or
- How long it’s taking for your accounts receivable to be paid by your customers, and
- How much money you’re making each time you complete a project such as kitchen renovation.
Why does it matter how long it takes for your customers to pay for your services and goods? Because there is a relationship between how long it takes for customers to pay and how much money is ultimately collected. The longer someone takes to pay, the less likely you are to collect on your accounts receivable. In addition, information on accounts receivable turnover can be used to ensure your company has the cash it needs to fund its operations.
Data becomes information when it has value. One of the drivers of that value is the ability to use the data to recognize useful patterns. When your business’s financial information is compared to industry information it is easier to identify patterns both positive and negative.
A mid-size construction business – another example
You’re a mid-size construction business and you want to expand, but there are a number of different types of jobs you can use to drive that expansion. You compare your financial results to other mid-size construction businesses and you notice that you turn over your construction-in-progress account 50% faster than your competitors with a 3% better margin. Looking at your operations you realize that you can complete small jobs quickly giving you an advantage.
Based on this analysis, you should be concentrating on growing through increasing your volume of small jobs while making sure you maintain (and protect) the operational processes that allow you to finish jobs faster. If you were eyeballing a large construction project as a way to grow you probably shouldn’t do the job as it works against your competitive advantage.
You’re an engineering firm, you’re analyzing your financial information and you notice that your bad debt expense is higher than the average for similar size firms in your industry. On further inspection you realize that your accounts receivable turnover is slow. Your billing and collections practices are not as strong as your competitors and its costing your business money.
Any weakness you identify between how your business performs and how your competition performs is a cost that means you have less resources to compete against them with. Any strengths identified through analysis need to be protected, and any weaknesses corrected.
Crowe MacKay can help you leverage your financial records through analytical analysis. In addition, we have industry data that can help spot trends, both positive and negative, in your financial statements. If you have any questions about using analytics to improve your business performance we are happy to help.
Did you find this article useful? You might also be interested in “How to Use Big Data to Grow Your Business“.
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