Going beyond bookkeeping with financial statements analysis


One of the most common and predominant motivations behind establishing a business is to generate revenue. It feels great to make a profit, but the experience may become unfulfilling if you don’t understand where or how exactly you are making a profit - and what areas are limiting an even higher profit. You could be making double-digit profits, which is encouraging, but maybe you want to start generating triple-digit profits. For you to identify all the factors that limit or increase your earnings, you need to go beyond bookkeeping. 
Bookkeeping is the maintenance of an entity’s accounting books through the record of all the money received and dispensed from a business (income and expenses). On completion of the bookkeeping process, a set of financial statements that show the financial results of the company are produced. Financial statements record profit/loss made by the business over a certain period, the assets and liabilities as at the reporting date, and the cash movements during the reporting period. Financial statements consist of an income statement, balance sheet and cash flow statement, and statement of changes in equity. 

Commonly, a bookkeepers’ work for small businesses is complete at the presentation of financial statements. Most family-run and small businesses maintain books of accounts and present financial statements for compliance purposes. But is that all it’s supposed to be? When you end at bookkeeping, you are not deriving full value from your financial statements. Your interpreted financial statements should highlight issues and identify areas in which the business is doing well as well as those that require more effort or adjustments. Going beyond bookkeeping is an essential part of strategic business making to elevate your business to a higher level. The world has become so dynamic, and it calls for companies to keep up with constant changes to maintain profitability and continuity.

As reported in some forums, 40% of small businesses make a profit, while 60% either break-even or make a loss. The break-even or loss-making companies could be reporting by going beyond bookkeeping to identify problem areas. Similarly, profit-making businesses stand to improve. 
Going beyond bookkeeping is to use financial statements to evaluate the financial condition of a business. It is to analyse the profitability, growth, and stability of a company and draw conclusions that will bring recommendations and new strategies to drive the company to optimum performance. This is otherwise known as financial statements analysis and interpretation.
When business managers ignore financial statements analysis, they are doing a disservice to their business. Business decisions must be taken not out of intuition, but from the facts as deduced from both financial and operational perspectives. 

Objectives of financial statements analysis

  1. To measure performance in terms of profitability.
  2. To measure the effectiveness of management efforts relative to forecasts and budgets.
  3. To evaluate the ability of the business to meet short and long-term obligations. 
  4. To generate recommendations about the company’s future.
  5. To measure the effectiveness of the assets deployed in the business.
  6. To make a comparison of business performance over a number of periods.
  7. To understand how and why things have changed in the business over the years.
  8. To make a comparison of company performance with that of competitors or other companies in the same industry.
  9. To assess the value of the business.
  10. To generate projections for the future through forecasting and budgeting.
  11. To measure the returns for investors of the business.
  12. To enhance business analysis and planning process.
Businesses that enjoy the benefits of financial statements analysis found themselves ahead of those that have ignored the analysis. Some of those benefits are:
  1. Managers get an accurate understanding of the financial and operational strengths and/weaknesses of the business.
  2. It identifies the necessary performance drivers required to sustain growth and stability. 
  3. Historical performance analysis brings about the basis to set objectives and goals for the future. 
  4. It aids in better debt management by knowing the solvency and liquidity state of the business 
  5. Compliance and legal issues and stakeholders’ expectations can be addressed with a better perspective.
Financial statement analysis utilises financial techniques such as:
  • Horizontal analysis - It compares financial data between two periods and the percentage changes from one period to another are determined. 
  • Vertical analysis - Derives the relationship of each revenue and expense item to the sales from the financial statements of a single period.
  • Trend analysis - It compares financial data over three or more periods to determine the trend/pattern, whether it’s upward or downward from one period to another.
  • Ratio analysis – Uses calculated ratios to assess the business’ levels of profitability, liquidity, financial leverage and efficiency. Ratio analysis also provides an industry position, competitive position, and ratio comparisons across periods.

Every business must carry out financial analysis for it to thrive, grow and find stability in the marketplace.

Book an appointment with us for further discussions relating to your business.

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