7 things to cover in a business financial analysis

You can measure the success of your business in lots of ways. Receiving positive reviews online, serving new customers, and increasing web traffic are good indicators that your business is doing well. 

But if you want to know the true success of your business, you need to understand how it’s performing financially. After all, even a popular business can fail if it encounters cash flow problems or profit loss. 

Understanding the financial health of your business can help you make smarter business decisions, build long-term plans, and understand financial trends within your company. Plus, studies show that business owners who understand their finances are more likely to see success. Better financial management directly correlates to better financial health. 

Conducting a financial analysis will help you more accurately determine the financial health—and success—of your business. You can hire a financial analyst to do the heavy lifting for you, or you can conduct a financial analysis yourself. 

Every business owner should include seven key components in their analysis:

1. Income statement

An income statement, or profit and loss statement, is one of the three most important financial statements to run and operate a successful business. It compares your income to your expenses and calculates profit or loss over time. Simply, an income statement tells you if your business is making or losing money. 

If profits are low, an income statement can help identify your top spending categories and lowest earning revenue streams. If profits are high, an income statement can help identify your top performers, so you can focus on the things that bring in the most money for your business. 

It’s common to generate an income statement each month, allowing you to chart growth and sales trends over time. 

2. Balance sheet

A balance sheet is the second most important financial statement to run a successful business. A balance sheet subtracts what your business owes (liabilities) from what it owns (assets) to calculate your business’s net worth. 

Understanding the net worth of your business can help you monitor the financial performance of your company and communicate with investors. Beyond that, a balance sheet can help identify patterns in your finances, locate hidden costs, and reduce unnecessary expenses.

3. Cash flow statement

A cash flow statement rounds out the trifecta of financial statements to run a business effectively. A cash flow statement records money flowing in and money flowing out of your business—providing a snapshot of changes in your business’s cash balance. 

Not to be confused with profit, cash flow measures whether your businesses cash on hand is increasing or decreasing. A business can be profitable but still struggle with cash flow. In fact, a 2020 QuickBooks survey found that most small business owners (62%) regularly struggle with cash flow issues. For nearly half of them (44%), these issues came as a shock. 

Regularly generating a cash flow statement can help you avoid unpleasant surprises by highlighting cash flow trends and predicting how much cash you will need in the future to fund your business operations.

4. Accounts receivable report

Understanding your business’s profit and cash flow is a great first step towards understanding its financial health. Analyzing an accounts receivable report goes one step further. 

Accounts receivable measures the dollar amount of credit sales that are not collected in cash. In layman’s terms, it represents the amount of money your business is owed. Monitoring your accounts receivable report can help you identify past-due payments and implement a collections process. 

Beyond that, you can use your accounts receivable report to calculate your accounts receivable turnover ratio. This ratio measures how efficiently your company collects revenue. A higher ratio indicates that your business collects payments from customers more often throughout the year. A lower ratio might indicate an opportunity to improve cash flow. 

5. Accounts payable report

On the flip side, an accounts payable report measures the total amount of unpaid bills owed to third parties for products and services they invoiced you for. Accounts payable is considered a liability on the balance sheet. 

Aside from tracking short-term debts, the accounts payable process plays an important role in determining your business’s financial health. More than half of small businesses experience cash flow forecasting problems due to accounts payable issues. 

Great accounts payable insight helps you strategize your spending and settle your debts. Tracking invoice data in your accounts payable report paints a clear picture of your transaction history, helping you identify and resolve spending issues.

6. Inventory report 

In retail, an inventory report summarizes your existing inventory. It's a wealth of information for small business owners hoping to understand their financial health, yet this report often goes unused. An inventory report can help you identify which products are selling and which are taking up valuable shelf space. 

Use an inventory report to calculate your inventory turnover ratio. This ratio measures how often your business sells and replaces its inventory. 

A higher inventory turnover ratio indicates strong sales and fast-moving products. A lower ratio indicates weak sales and excess inventory or low demand. However, a higher ratio could result in lost sales if there isn’t enough stock on hand to meet the customer demand. 

Accurately tracking your inventory and understanding turnover ratios can help you avoid ordering excess products and maximize your sales.

7. Important financial ratios

You need to keep in mind a few more important financial ratios as you assess your business’s financial health. 

Current ratio: The current ratio is a key metric for determining the financial health of your business. It divides current assets by current liabilities to determine if your business has enough current assets to pay current liabilities. Simply, it determines whether or not your business can pay its debts. If your current ratio is less than 1, you might need to borrow money or sell some assets. 

Quick ratio: Similarly, the quick ratio or “acid test ratio” is a liquidity test. It measures your company’s ability to pay current liabilities with cash assets (or quick assets that readily convert to cash within 90 days). Simply, it determines how fast your business can pay back its debts. Keeping tabs on your quick ratio can help you stay on top of your finances and understand how much of a savings cushion your business needs. 

Debt-to-assets ratio: Finally, the debt-to-assets ratio measures your company’s financial stability. This ratio determines how much of your business is funded by debt and how much is funded by assets. A debt-to-assets ratio higher than 1 indicates that the company is significantly funded by debt, or that you have more liabilities than assets. If this is the case, investors might see more risk than benefit in investing in your business. 

Seeing the big picture

Each of these reports and ratios acts as one small piece of the larger puzzle that is your business’s financial health. A business can be profitable but struggle with cash flow. A business can have cash flowing in but struggle with net worth. By conducting a full financial analysis, you’ll gain big picture insight to make smart money decisions for your company and see true business success. 

Building accurate financial reports is easier when you use accounting software like QuickBooks Online. QuickBooks automatically tracks and categorizes business expenses, providing the data you need to predict and manage your cash flow. 

If you use Amazon Business, the Amazon Business Purchases app is a smart and simple way to track and import transactions in QuickBooks. Plus, QuickBooks features built-in financial reports like income statements, cash flow statements, and accounts receivable reports, providing the financial insight you need when you need it. 

When it comes to your business finances, accuracy is imperative. QuickBooks can help.

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