The value of financial analysis in business management

Do you know how important it is to carry out a financial analysis of your company? Or how does having reliable financial data help you make decisions? Or how important is your accounting in this aspect?

Most people do not use the financial analysis process . Sometimes due to lack of knowledge of the existence of this process or not knowing its real importance for a company’s decision-making.

But financial analysis is a very useful process for you to leverage your company, attracting more customers and investors. Interested in the subject? Keep reading and learn about the importance of financial analysis in your company and how your accounting can help you!

Financial analysis concept

Financial analysis, also known as economic analysis, is the study of a company’s ability to generate profit. This is also a way to measure your development. Through it, we find methods that allow us to evaluate the financial situation of the business. The objective is to determine your performance to make the best use of your resources.

We can, therefore, measure the company’s ability to generate profit through indicators. The same ones that will help us see your real performance. Only then will we know whether the company’s finances will be positive or negative, helping us make short, medium and long-term decisions.

The importance of financial analysis

We notice today that many companies are having difficulties in being able to impose their businesses. These situations can be caused by several reasons. Some examples are: internal problems within the institution itself, competitors or any other problem arising from the country’s current economic situation. Some of the reasons that cause a company’s revenue or profit generation to fall are poor management, lack of experience and planning, lack of cash flow control, lack of working capital , among others.

To be a good company manager, it is essential that he identifies his financial situation. This way, you gain more ease and autonomy when making decisions in a short space of time. However, you need to identify your ability to keep your accounts up to date and analyze your results. This way, it will be possible to identify existing problems in the entity’s economy.

It is very important that you maintain accounting data up to date. A good accountant can help you in this aspect since financial statements, as well as all the data and information provided by accounting, will help identify any problem concerning financial management and will then help make future and immediate decisions for the company.

Thus, with you carrying out the financial analysis, seeing the positive and negative points of the company’s economy, you will be able to develop methods to develop your company’s growth. Because a company that has its finances up to date presents a good image to the public. It starts to attract more customers and even investors, who will ensure the financial health of the entity.

How can I achieve financial balance?

There are several ways or techniques through which we can compose the financial analysis of a company. But there are specific points that are simple and easy to evaluate.

A manager must always keep an eye on improving their savings and making the best use of the institution’s resources. Below we list some points on which you can focus and reduce the impacts of bad past choices, evaluating your ability to generate profits and your stability.

Fixed cost

Also known as structural costs, they are those that do not change their value in the event of an increase or decrease in production. In this case, it is essential for the maintenance and continuity of the company. Its monitoring must be regular, that is, it must always be studied, minimizing its impact. Examples of fixed costs: Security, Equipment Rentals, Cleaning, among others.

Variable cost

Those that vary according to production, the volume produced or the volume of sales, in a certain period of time, directly influencing the values ​​of the products. Examples of variable costs: raw materials, sales commissions, inputs, among others.

Operating profit

Nothing more or less than calculating profits after deducting all fixed and variable costs.

Contribution margin

This is the amount of money left over from the Revenue obtained through sales after removing variable costs and expenses. This enables an analysis of the break-even point and profitability. The greater the positivity of this index, the better the health of your company.

Sales Price

This should be one of the first assessments you have. The prices of your products and services must contain a strategic action segment, taking into account competitiveness factors, consumer vision, positions compared to competitors, profitability and demand for the product or service.

Invoicing

Know your sales volume, knowing the demand for your services and products, how much and for how much they are sold.

Growth

This is equivalent to the asset growth of your company, represented by the analysis of net worth, the growth in revenue volumes and even the increase in the business structure.

Economic indicators

Economic indicators allow us to see how the entity’s financial health is progressing. Through them, performance comparisons are made over a certain period of time, evaluating the positiveness of the choices made. Even showing possible errors, which can still be corrected and reducing their impact on the institution’s savings. Below are some indicators that you should always pay attention to to improve your company’s financial/economic performance:

Profitability and Profitability Index

It serves to demonstrate the relationship between operating profit and sales. They are quantitative measurements, simple to calculate. They relate the variables of companies’ financial statements, mainly the Balance Sheet . Through this index, it is possible to know the ability to analyze a company’s net profit.

Liquidity Index

It assesses how much the company can assume with its obligations. It is extremely important so that the administration can continue the institution. The information for the calculation is taken from the Balance Sheet, which must be constantly updated for a correct analysis of accounting data to occur.

Debt ratio

Evaluates the volume of debts with the company’s capital. Through it, it is possible to monitor how much of the company’s movements use third-party capital or are financed by the company’s own capital.

Average payment term index

This metric is based on the average number of days it takes for the company to pay its debts or obligations to suppliers.

Average collection period index

This is the average number of days that the institution needs to wait until it receives the value of its sales.