If you want to evaluate the business performances of your company, financial analysis is what you should pay attention to (Also see Characteristics of Successful Business Owners). It includes a comparison of records, usually financial data prepared using Financial Reporting Standards (Also see FRS 1）. The purpose of conducting financial analysis is to utilise that interpretation and comparison of financial data to acquire a perception about the performance of a business. This will help you in determining areas that you can refine and improve. A simple financial evaluation may bring the following advantages to your company.
• It encourages the use of the same technique so that we can quickly identify the differences in the operations of a company as time passes.
• It provides answers to some critical concerns. For instance,
i) Why does a particular business make more profit than another?
ii) Why is a business less successful than the others?
iii) What sort of gains the shareholders will obtain from their financial investment in the company as they invest in the projects?
iv) How solvent is a business?
v) Does a company have a capability of paying its debt by the deadlines?
vi) How properly a company can handle its assets, especially its working capital, for example, creditors, debtors, inventories, and so on.
A financial evaluation will clear your doubts about the queries above. It is not necessarily used to solve those concerns.
• The financial analysis enables us to analyse the short-term and long-term liquidity, the performance of the business, as well as the operational efficiency of a company (Also see How Can Bookkeeping Services Indicate Business Health?).
• By using the financial analysis, we can evaluate the changes in the performance of a unit when compared to another. Besides comparing the performance of one firm to another, we can also make comparisons between a company and the benchmark of an industry.
• There are about fifty prominent accounting ratios which are useful in analysing financial statements. Nevertheless, we should never conclude the ratio performance of a firm only by looking at a single ratio. We have to compare the outcomes with the periods before. This is to enable us to know the trends and make comparisons between firms in a similar sector.
• We do not judge firms merely by looking at their financial or ratio analysis. Instead, we use it as a supporting document to analyse the business of a firm.
• Financial analysis is also vital to all the shareholders. For example:
i) Undoubtedly, shareholders would like to ensure that the company is well-managed and they want to minimise the funds that are tied up in the company
ii) Creditors and lenders would like to know how the company handle its working capital
iii) Lenders, for example, banks, will keep an eye on the liquidity of a company to ensure that the company can settle the capital amounts and the interests they owe on a loan
iv) Competitors will be curious if a competing company has the capability of managing its assets more efficiently since that might be a competitive advantage compared to them.
You will only be able to conduct an accurate financial analysis when your balance sheets, income statements and books of accounts illustrate the actual condition of your finances. If the accounts are not prepared using the proper double entries system (Also see Advantages of double entry accounting), it can be challenging for you to evaluate the performance of your company. Thus, it is crucial to employ a professional accounting service in Singapore to handle your firm’s finances.