When you’re running a business, it’s important to understand your financial position. This means knowing how much money you have coming in and going out of your company. To understand this, you’ll need to consider your assets, liabilities, cash flow, and the like. This guide will walk you through the steps of determining your company’s financial position so you can make informed decisions about improving it.
To determine your company’s financial standing, you’d need sound accounting services to reveal your financials. If this isn’t your forte, don’t worry; you could follow the basic steps below as a start:
1. Identify Your Assets
The first step in determining your company’s financial position is identifying its assets. Assets are things that have value and can be either tangible, like a machine or building, or intangible, like intellectual property. Tangible assets may also include cash and other liquid assets such as stocks and bonds.
2. Identify Your Liabilities
Liabilities are generally the debts you owe to others and include bank loans, credit card balances, and other types of debt. These are future obligations that must be paid back with interest for the company to continue operating. They typically appear on the left side of the balance sheet below assets.
3. Account For Cash Flow
Cash flow is the difference between cash in and cash out. It’s a very important measure of your company’s financial health and should be calculated regularly, usually monthly or quarterly. Cash flow can be positive or negative, depending on whether you’re bringing in more money than you’re spending.
For example, if one month your business makes USD$5 million but spends $6 million during that same period, then it would have an unfavorable cash flow of -USD$1 million. In contrast, if there was no difference between revenue and expenses for any given month—i.e., USD$5 million came in through sales versus USD$5 million left out through purchases—then there would be no change in overall net assets. This would also mean there was no change to account for when calculating financial statements.
4. Analyze The Balance Sheet
The balance sheet is a snapshot of your company’s financial health. It shows the value of all the assets owned by your business, and it lists all the liabilities you owe to creditors. In other words, it’s a snapshot of everything you own and owe—at one particular moment.
The purpose of a balance sheet is to help you understand how financially strong or weak your business is at that moment in time. If some of your assets have decreased in value since last month and liabilities have increased, then this means that your business has less cash available than before—and, therefore, may be in trouble.
5. Analyze The Income Statement
An income statement is a snapshot of your company’s financial performance over a period of time. It shows the profit or loss for your business. The income statement can also be called a profit and loss statement or P&L.
6. Carry Out Financial Ratio Analysis
Financial ratio analysis compares a company’s performance against its industry, peer group, and other companies in the same sector. It allows you to determine whether your business is operating efficiently and effectively by comparing its operating results with those of comparable businesses. This is done by calculating a number of key financial ratios that help identify strengths and weaknesses within an organization.
The most common financial ratios are:
- Earnings per share (EPS);
- Book value per share (BVPS);
- Cash flow return on investment (CFROI);
- Residual income model (RIM);
- Return on assets (ROA); and the like.
You could do some online research or consult a professional to understand how they work.
7. Keep In Mind The Other Finance-Related Factors To Consider
Other factors that can affect your financial position include operational efficiency and industry trends. If you have an efficient operation, it’ll generate more revenue for less expense. That means more money in the bank and a better financial position.
Some industries are growing fast, while others are shrinking or stagnating. If you’re in a growing industry, that’s good news. You can use this opportunity to increase revenue and profits.
On the other hand, if your business is in an industry with low demand right now, then maybe it’s time for some serious soul-searching before making any large investments like opening new locations or buying new equipment. Doing so might just put more strain on your bottom line.
Your financial position is one of the most important aspects of your company. It allows you to see where your business stands and allows you to make adjustments if necessary. If you want to understand where your company is and how it can improve, it’s important to look at your financial statement. This will help you make better decisions about your company’s future and provide insight into what areas need improvement.
If you’re new to accounting, plenty of online resources can help you learn these things—and if you get stuck on something, don’t hesitate to ask an expert.