How Financial Analysis Fuels Tactical Execution for Growth
Analyze Financial Ratios
Financial ratios are vital tools in financial analysis that can guide you in developing action plans for profitability, leverage, and liquidity. Although they traditionally analyze past performance, financial ratios also serve as strategic predictors, highlighting weak areas in your business. Addressing these areas can optimize growth and provide a comprehensive view of your business’s past, present, and projected financial performance.
Horizontal Analysis
Conducting a horizontal analysis involves comparing financial ratios from your current financial period to those from previous years. The number of years you can compare depends on the financial analysis software you use. For example, iCFO allows you to compare up to four years of financial statements, enabling you to spot trends and make necessary adjustments to your business practices. If you’re analyzing a startup, the ability to forecast financial performance is crucial for driving growth, even without years of historical data.
Pro Forma Financial Statements
Pro forma financial statements, or projected financial statements, help forecast future balance sheets, profits, and anticipated borrowing needs. These statements are part of your business growth strategy, allowing you to track actual events against projections and make adjustments as needed throughout the year. Typically, pro forma statements cover periods of six months to one year.
To create a pro forma income statement, which projects future profits, you’ll need to establish a sales projection, set up a production schedule, calculate other expenses, and determine expected profits. Monthly cash budgets can help you monitor your firm’s cash position, providing the data needed to construct a pro forma balance sheet that reflects changes over time.
Create ‘What-If’ Scenarios
Financial analysis can drive your growth strategy by enabling you to create ‘what-if’ scenarios. While forecasting future financial statements is common, creating these scenarios allows you to see the impact on key indicators. For example, using tools like iCFO, you can improve Return on Assets, a measure of how efficiently your company uses its assets (cash, inventory, accounts receivable) to generate sales. This insight can help you formulate a growth strategy.
Improve Your Sustainable Growth Rate (SGR)
Sustainable Growth Rate (SGR) is the rate at which your company can grow without encountering financial problems. It’s important to recognize that many businesses fail during their fastest growth periods. Therefore, ensuring sustainable growth is crucial. Calculating SGR can be complex, so using financial analysis software is recommended to simplify the process. Tools like industry benchmarking and financial modeling can help you identify opportunities to improve profitability, which is essential for calculating SGR and focusing on areas that need improvement.
While financial analysis requires time and understanding, it is essential for building a successful business with a clear growth plan.
