Important Elements in Financial Analysis

Making a profit is one of the goals in running a business. Unfortunately, there are still many businesses that rely on intuition in calculating profit and loss figures. You need to know what is called financial analysis to find out business performance.

Financial Analysis is needed in various business scales, both MSMEs and large companies. Financial analysis helps you to plan and have an accurate view of the stability and profitability of the business.

However, you need to be careful when preparing financial analysis. Pay attention to various important elements in making analysis. For more details, see the explanation below.

Understanding Financial Analysis
 

Financial analysis will involve evaluating projects, budgets, and other financial elements in the business. Therefore, financial analysis will be closely related to the strategy and performance of a business.

With financial analysis, you can examine business assets from various points of view. You can see the condition of stability, profits, and assets converted into cash. In other words, financial analysis aims to test the profitability and financial health of assets.

Analysts will try to get a clear view of the steps the business needs to take financially. In addition, the analytical data obtained can be used to answer all questions about the financial position of the business. It is not uncommon for this data to be used to provide strong understanding in building new strategies.

Important Elements of Financial Analysis

Financial analysis is the first step that needs to be taken to maintain long-term business growth. The following are the elements in carrying out financial analysis:

1. Profit and Loss Report

This report covers financial performance in a certain period. This report will also help you to predict future performance and cash flow. The profit and loss statement will include:

•  Gross profit margin is the percentage of revenue that has been reduced by the cost of goods sold. The difference from the gross profit statement is calculated by dividing your gross profit by your revenue from sales.
•  Operating profit margin is the amount of revenue remaining after operating costs and COGS. Calculated by dividing income by income.
•  Net profit margin is the percentage of revenue minus all expenses from sales to determine profit capability. Calculated by dividing net profit by revenue.
•  Revenue growth is a report on the percentage of growth in a certain period. Calculated by subtracting the previous period's income from the current period's income. Earnings are then divided by the previous period's earnings.
•  Revenue concentration is the assessment of clients who generate the most revenue. Calculated by dividing revenue from one client by your total revenue.
•  Revenue per employee is an assessment of the productivity of the business and employees required. Calculated by dividing revenue by the number of employees.

2. Financial Balance

The balance sheet reflects all the company's liabilities and equity. Later, the total amount of the financial balance must be zero. The following is included in the financial balance sheet.

•  Assets (Liabilities and Equity)
•  Liquidity Ratio
•  Leverage Ratio
•  Efficiency Ratio

3. Cash Flow Statement

The cash flow statement provides liquidity of the amount of cash generated during a certain period. The cash flow statement usually includes:

•  Inventory turnover
•  Accounts receivable
•  Total asset turnover
•  Net asset turnover

4. Financial Ratios

The list of ratio analysis should include:

•  Debt to equity ratio
•  Current ratio
•  Fat ratio
•  Return on equity
•  Difference in net profit

You can find out more about the ins and outs of financial analysis by following Prasmul Eli's Financial Analysis Program. This program is aimed at all groups, from company management to bankers. That way, the business you run will be more controlled in terms of finances and asset utilization.