Improving Your Financial Statement Analysis

Financial statement analysis requires a combination of analytical, problem-solving and technical skills. Useful financial statement analysis can bring short- and long-term benefits to your business by providing a detailed statement evaluation. Many companies have not yet taken steps to improve their financial reporting, however, implementing a few of the suggestions below will be the necessary step in analyzing the success, failure and progress of your business.

Types of Financial Statement Analysis

Fluctuation analysis, or horizontal analysis, is the most basic form of financial statement analysis and simply involves a review of changes in the balance sheet, income statement and other balances from period to period using historical data. When performing fluctuation analysis, both dollar and percentage changes should always be analyzed. Reporting should include columns that present such fluctuations as this will improve the efficiency and effectiveness of your analysis.

It is important to understand the relationship between the different accounts and balances. These relationships can help to explain a significant fluctuation. They can also lead you to investigate why a balance did not change from year to year as expected based on changes in related balances.

Common size financial statements, or vertical analysis, are statements showing percentages rather than dollar amounts. These percentages are based on a key amount in the statement, such as a percentage of sales. The common size ratios provide a starting point. You can quickly analyze unusual changes that have occurred.

Ratio analysis involves analyzing financial statements using key financial ratios. Ratios provide insight into the operation of a business. They serve as “benchmarks” against which a company can evaluate itself. Ratios can be compared with previous periods, a budgeted standard or even industry comparisons. The analysis of critical measures of business performance, such as profit margins, inventory turnover and return on equity, can detect emerging problems and strengths.

Utilizing Financial Software

Accounting and financial reporting systems have improved considerably in recent years. Ensure that you are utilizing all reporting functions directly from your software to eliminate data loss or errors. Also, consider utilizing financial performance dashboards to provide dynamic and real-time financial reporting to management. Dashboards allow users to create charts, graphs and tables to look at working capital, cash conversion cycle, inventory usage and more. Dashboards can be tailored to connect financial performance to organizational goals based on the decision-maker’s needs. Real-time data analysis improves your company’s agility by putting everyone on the same page and allowing teams to hit the ground running.

Conclusion

Financial statement analysis is a necessary function in the effective management of a company. It is important to regularly evaluate the reports available for financial statement analysis and the procedures being performed. If your company is not effectively analyzing its internal financial reports and comparing operating results to others within the industry, then management does not have the necessary data for proper decision-making. This puts your company at a competitive disadvantage to other companies that are performing more effective financial statement analysis.

If you would like additional information or need help improving your financial statement analysis, please contact Charla A. Roth, CPA, CDA at (315) 472-9127 or via email at croth@dmcpas.com.

Contributing Author:  Charla A. Roth, CPA, CDA, is an audit partner with over 21 years of experience providing auditing, accounting and consulting services. Charla specializes in working with manufacturers, architecture and engineering firms, and nonprofit organizations.