Analyzing Your Financial Position

After you've gotten the basics of financial recordkeeping down pat, and you have a good handle on your company's cash flow and other day-to-day issues, you may want to take a longer and deeper look at the financial state of your company. In some cases, you may need to undertake a fairly detailed financial analysis because you are looking for additional capital in the form of loans or investors.

Business owners who haven't been schooled in accounting often have a limited understanding of how financial analysis can help them manage their businesses effectively. Although you may be used to getting quarterly or annual financial statements from your accountant, are you sure that you're really making the best use of all the information contained in them?

Over the years, accountants and financial professionals have developed a number of systematic ways of arranging and comparing the financial facts about your business so that they can be used to make sound decisions about future actions. In the following section, we'll discuss some of the most commonly used tools for financial analysis:

• financial statements, including the income statement, balance sheet, statement of changes in financial position, and statement of changes in owners' equity
• business ratios that identify key relationships between financial data and allow you to monitor your liquidity, profitability, and efficiency
• cost/volume/profit analysis, a way of determining the true cost to you of providing your product or service, and the optimal operation level for your business