Analyze Financial Ratios

Financial ratios are important financial analysis tools that can you help you implement action plans for profitability, leverage, liquidity and more. This is a traditional financial statement analysis tool.

While ratios mostly report on a business’s past performance, they also act as a strategic predictor tool that pinpoints a business’s weak areas. Then, the owner can start improving this area in order to optimize growth. This gives you a 360-degree view of your business allowing you to look at past and present performance as well as financial projection for the future.

Horizontal Analysis

You can analyze financial ratios during your current financial period compared to the past year of your company’s financials. This is known as a horizontal analysis. The number of years you can compare financial statements will rely on the financial analysis software you are using. For instance, iCFO allows you to compare up to four years of financial statements (if you have four years’ worth of statements).

This comparison will allow you to identify good and bad trends and adjust your business practices accordingly. When you compare your company’s financials to another company’s financials, you can see exactly how your ratios stack up against each other.

However, if you’re analyzing a startup’s financials, you wouldn’t be able to analyze years of financial information, but having the capability to forecast financial performance will fuel your tactical execution for growth.

Pro Forma Financial Statements

Pro forma financial statements or projected financial statements help predict future levels of balance sheets (list of the business’s assets, liability and capital accounts), profits and anticipated borrowing. The pro forma financial statements are the business’s financial plan.

It allows you to track actual events against the pro forma statement and make adjustments accordingly throughout the year. You can develop a statement for varying time periods. Generally, the time periods are either six months or one year.

To prepare this comprehensive financial plan, you need to prepare a pro forma financial statement, a cash budget (the analysis of the movement of cash through a business), and a pro forma budget sheet.

To calculate the pro forma income statement, which projects how much profit the business forecasts earning over a given time period, you will need to establish a sales projection, set up a production schedule, calculate your other expenses and determine your expected profit.

Calculate cash budgets each month to get a good handle on the cash position of the firm, meaning what cash is going in and going out.

Then, you’ll have all the information you need to construct the pro forma balance sheet, which demonstrates the changes in a business over time. You will also need information from the previous year’s balance sheet. 

Create ‘What-If’ Scenarios 

Financial analysis can directly fuel your plan for growth by allowing you to create ‘what-if’ scenarios. While forecasting future financial statements are common, being able to create ‘what-if’ scenarios is rare. Within our application, you can see impacts on important indicators.

For example, in iCFO, you can improve Return on Asset Investment. Return on Assets allow business owners to calculate how efficiently one’s company is using its total asset base (cash, inventory, accounts receivable) to generate sales. You can then use the generated information to formulate a plan to help grow the business.

Improve Your Sustainable Growth Rate (SGR)

We must discuss SGR, which is the attainable growth your company maintains without running into issues. It’s important to mention that many companies actually fail during their fastest years of growth. Growing your business is not enough. You need to ensure your business is sustainably growing.

Calculating this measurement can be complex on your own, so we suggest using financial analysis software that allows you to simply plug and play and get the results you need easily. Industry benchmarking and financial modeling can allow you to see opportunities for improving the business’s profitability – the factor you must know to calculate SGR. This allows you to focus on weaknesses and begin to improve.

Analyzing your financials may take time and understanding, but it’s necessary and beneficial to becoming a successful business with a plan for growth.