How Often Should Companies Perform A Financial Analysis?

I think every business owner wonders if they are doing enough. It can be hard to tell what enough (and too much) is, so it’s not surprising if you find yourself asking, ‘How often should I be doing a financial analysis?’. Regular financial analysis is crucial to the success and growth of a business. Analysing financial statements, including the profit and loss statement, balance sheet, and cash flow statement every month enables business owners to monitor the company’s progress and stay on track towards goals.

While business owners need to stay on top of their figures from month to month, it is crucial to complete a detailed annual review, ideally at the end of each calendar year.

It’s not overkill because you get different information from different reviews. Monthly reviews allow for a close examination of revenue and expenses, showing whether the business is on track or if strategic adjustments need to be made, while an annual review will reveal patterns that can assist in forecasting future business performance. 

You can use an annual review to identify peak periods or potential slowdowns as well as provide an opportunity to compare performance against the goals you set at the start of the year.

Key Takeaways

• Monthly financial analysis aids in tracking progress towards business goals and adjusting strategies as necessary.
• Regular review of transactions safeguards against fraud and errors, ensuring financial accuracy.
• An annual comprehensive financial analysis complements monthly reviews, providing a year-end overview crucial for strategic planning and tax purposes.

Fundamentals of Financial Analysis

Getting your head around your finances takes some time as there are a few parts involved. 

The core financial statements provide a robust view of a company’s financial health and consist of:

• Balance sheet
• Income statement
• Cash flow statement

If you are just starting out in business this is the perfect time to get into your financial breakdowns because you can start small and build your knowledge as your business grows. 

If you have been in business for a while and haven’t bothered with anything other than what’s going into your bank account – I actually have some good news for you because you have an amazing opportunity to increase your profits as you put solid systems in place and set up some structure. 

It’s never too late to get financial control of your business. I should know, I didn’t get into any of this side of my business until I got a mentor. I honestly didn’t think it was necessary since I was killing it, even in a saturated industry that already has established brands! It wasn’t until I hit a speed bump and my business crashed that I realised how wrong I was on that. As I said, it’s never too late. I was able to recover from an insane loss and bounce back stronger than ever, once I had these structures in place…

Understanding Financial Statements

You’re not expected to pull a financial review out of thin air. You’ll use your financial statements as the foundation, so to get any kind of help or reliability out of your annual business review you are going to need some quality accounting practices in place throughout the year for your: 

Balance sheet

The balance sheet reflects your company’s assets, liabilities, and equity at a specific point in time, offering insight into its net worth. Assets are what the company owns, such as property and equipment, while liabilities are obligations like loans and accounts payable. Equity represents the shareholders’ stake in the company. 

Income statement

Also known as a profit and loss statement, the income statement details your business revenues and expenses over a period. This statement highlights the company’s ability to generate earnings and manage costs. 

Cash flow statement 

The cash flow statement tracks the flow of cash in and out of the business, significantly impacting its liquidity.

Performance Metrics

You’ll use your financial statements to extract performance metrics that analyse your financial performance. The key metrics are; profitability, liquidity, solvency, and efficiency. 

• Profitability: Relates to the company’s ability to generate profits from its operations. Indicators here include the net profit margin and return on assets.
• Liquidity: This concerns the company’s capacity to meet short-term obligations, with the current ratio and quick ratio as common measures.
• Solvency: Regarding the company’s long-term stability and its ability to manage debts, debt to equity ratio is often scrutinised.
• Efficiency: This involves evaluating how effectively the company uses its assets, which can be assessed through inventory turnover and receivables turnover ratios.

The correct interpretation of these metrics is critical to assess potential investments, financial stability, and growth prospects.

Financial Analysis Techniques

Financial analysis techniques are used for a variety of purposes in business and investment decision-making. These techniques help in understanding, evaluating, and interpreting financial data and statements especially around:

• Assessing Financial Health
• Performance Evaluation
• Investment Decisions
• Budgeting and Forecasting
• Risk Assessment
• Valuation
• Credit Analysis
• Regulatory Compliance
• Strategic Planning
• Cost Control and Efficiency

Each of these involves specific techniques and tools, ranging from simple ratio analysis to complex financial modelling, and they are crucial for making informed and effective business and investment decisions.

Ratio Analysis

Ratio Analysis serves as a cornerstone of financial analysis, offering insights into various aspects of a company’s operation by comparing two related figures from the financial statements. Ratios can be broken down into several categories:

• Liquidity Ratios: These assess a firm’s ability to meet short-term obligations. A common example is the Current Ratio, which is calculated as Current Assets divided by Current Liabilities.
• Profitability Ratios: These indicate how well a company can generate profit from its operations. The Net Profit Margin, calculated as Net Income divided by Revenue, is frequently used to gauge profitability.
• Solvency Ratios: These ratios, such as the Debt to Equity Ratio, measure a firm’s ability to sustain operations in the long term considering its debt levels.
• Efficiency Ratios: These measure how effectively a company is utilising its assets and liabilities. Inventory Turnover and Asset Turnover are typical efficiency ratios.
• Coverage Ratios: These look at a company’s ability to service its debt and interest obligations; the Interest Coverage Ratio is a primary example.

Trend Analysis

Trend Analysis examines financial statement data over a period to identify patterns and directions of a company’s performance. Identifying trends in revenues, expenses, and net income helps you forecast future performance. This analysis is particularly useful for spotting positive and negative trajectories that may not be evident with a single-period comparison.

Horizontal and Vertical Analysis

Horizontal Analysis, also known as trend analysis, involves comparing financial data over multiple periods. It highlights growth patterns and fluctuations in items such as revenues, cost of goods sold, and expenses by calculating the percentage change for each line item relative to a base year.

Vertical Analysis, takes a single financial statement and expresses each line item as a percentage of a base figure, such as revenue on an income statement or total assets on a balance sheet. This allows comparison across companies of different sizes by standardising figures and focusing on the proportional relevance of each line item. It’s a way to assess the structure of revenue, cost of sales, and other expenses.

Both analyses provide insights into how different elements of the financial statements interact with one another, revealing strengths and weaknesses in liquidity, solvency, and profitability.

Industry and Competitive Analysis

It’s not just about what you are doing and how well you are performing, it’s also important to check against industry standards and your competitors. This is a great practice for identifying strengths, weaknesses, and opportunities for refinement, which will help keep you ahead and keep your customers happy.

Benchmarking Against Competitors

Benchmarking is a vital tool that you can utilise to measure your financial performance against your competitors. Key financial metrics often include profit margins, return on assets, and liquidity ratios. Companies should perform this analysis monthly or quarterly to keep on top of the market and swiftly react to competitive pressures. 

The quickest way to do these is in table format:

A quick table provides a clear perspective on where your company stands against your competitors, helping to highlight areas for improvement or even investment.

Industry Specific Trends

Understanding industry-specific trends is key to effectively analysing a company’s financial performance. Look at growth rates and market sentiment to gauge the general health of the industry and any potential prospects. This analysis often involves reviewing industry reports or datasets that showcase trends over time.

• Growth rates can be indicative of the life cycle stage of the industry—whether it’s maturing, declining, or growing.
  
• Market sentiment may shift due to external factors such as regulations or technological disruptions, impacting financial performance forecasts.

A firm grasp of industry dynamics empowers companies to align their strategies accordingly and to anticipate changes that may affect their financial standing.

Strategic Financial Assessment

Your strategic financial assessment will help you map your financial health in terms of investment opportunities, growth prospects, inherent risks, and financing structures. This analysis is crucial for determining the viability of your business’s strategic direction and making informed decisions.

Investment and Growth Potential

To examine investment and growth potential you’ll be assessing operating performance and cash flows. This involves scrutinising the efficiency of your current operations and the prospects for future expansion. Ask if you can generate sufficient cash flow to support investments without compromising operational stability.

Key factors to consider include:

• Return on Investment (ROI): A measure of the profitability and efficiency of investments.
• Growth rates: Historical and projected revenue or earnings growth, indicating your expansion speed.

The analysis can also address whether your business has the right balance of debt and equity to fund new growth objectives and whether this leverage is within industry norms.

Risk and Financing

When addressing risk and financing, you’ll need to identify and quantify the various financial risks your business faces, such as market volatility, credit risk, or fluctuations in cash flow. 

Make sure you assess:

• Debt levels: High levels of debt can increase risk and affect credit ratings.
• Leverage ratios: Ratios such as Debt-to-Equity (D/E) provide a snapshot of the company’s financial leverage.
• Coverage ratios: These ratios, including the Interest Coverage Ratio, measure the company’s ability to meet debt obligations.

A strategic financial assessment will also need to evaluate your business approach to financing, whether through equity, debt, or a combination of these, to ensure that it aligns with its overall strategic goals and risk tolerance.

Advanced Analytical Techniques

As part of your financial analysis, you can get further into the nitty-gritty with some advanced analytical techniques. These are used to check how healthy the company is, how it’s doing, and what its future might look like. These techniques are detailed to help you make smart choices for the road ahead.

Modelling and Projections

Financial modelling is like the bread and butter for predicting how a company will do. Analysts use Dupont analysis to dissect return on equity and break it down to better understand where profits are coming from. They also look at past data, budgets, and what’s happening in the market to guess where the business is heading. These forecasts can range from simple Excel spreadsheets to advanced software, helping to predict things like revenue growth, expenses, and cash flow.

Valuation Methods

Valuation is all about figuring out what a company is really worth. To get the real value, quantitative analysis is used to determine intrinsic value. One popular method is the discounted cash flow (DCF), which is a bit like adjusting future money to today’s value via the net present value (NPV) method. 

Then there’s the internal rate of return (IRR), which helps figure out how profitable an investment might be by comparing it to the cost of borrowing money. Getting this valuation accurate is important for any investment decision, especially when it comes to big moves like merging with another company, buying one, or raising extra cash.

Conclusion

Regular financial analysis is not just a best practice; it’s a vital pulse check for your business. 

Whether you’re a budding startup or an established enterprise, the frequency of your financial analysis can make the difference between merely surviving and thriving in today’s competitive market. 

Short-term, monthly financial monitoring helps you stay agile, quickly addressing any financial hiccups and seizing timely opportunities, while also giving you the accurate and essential metrics you need for your long-term analysis through annual reviews.

Accurate financial assessments provide a roadmap to strategic growth enabling you to spot trends, plan for the future, and build a sustainable business model. By integrating financial monitoring and assessment into your business routine, you’re not just keeping an eye on the numbers; you’re actively steering your company towards stability, growth, and success. 

Remember, in the world of business, knowledge is power, and regular financial analysis provides you with the insights necessary to wield that power effectively. For help going over your financials, book a free strategy session so we can make a plan to balance your books.

How Often Should Companies Perform A Financial Analysis – FAQs

1. How often should financial reports be prepared?

Financial reports should typically be prepared on a regular basis to ensure timely and accurate insights into a company’s financial health. Most companies prepare financial reports on a monthly, quarterly, and annual basis. This frequency allows for consistent monitoring of financial performance and facilitates strategic decision-making.

2. How often do companies report financial statements?

Companies commonly report financial statements on a quarterly and annual basis. Quarterly reports provide more frequent updates, while annual reports offer a comprehensive overview of the entire fiscal year. These regular reporting intervals enable stakeholders to track financial performance, assess profitability, and make informed decisions about the company’s future.

3. How often is financial accounting done?

Financial accounting is an ongoing process within a company, involving the recording and classification of financial transactions. While daily activities contribute to financial accounting, the results are often summarised and reported periodically, typically on a monthly, quarterly, and annual basis. This periodic approach ensures that financial data is systematically organised for effective analysis.

4. Are financial statements quarterly or monthly?

Financial statements can be prepared on both a quarterly and monthly basis, depending on the needs of the company and the requirements of stakeholders. Quarterly statements provide a more comprehensive overview, while monthly statements offer more frequent insights into short-term financial trends. The choice between quarterly and monthly reporting depends on the company’s industry, size, and internal management preferences.

5. How often should you use financial statements in running your small business?

Small businesses should leverage financial statements regularly to support day-to-day operations and strategic planning. Monitoring financial statements on a monthly basis allows for quick identification of trends, timely decision-making, and adjustments to business strategies. This regular use of financial statements helps small businesses stay agile and responsive to changes in the economic landscape. Additionally, it aids in maintaining financial stability and achieving long-term business goals.