Quoting the opinion of Leanne Hoagland Smith in the book “Be the Red Jacket in a Sea of Gray Suit” said that business evaluation is an important thing to do so that you can believe that the business is growing, not stagnating or decreasing. How is your current business performance, is it satisfactory? Therefore there is nothing wrong if you do a business evaluation. Especially when it is the end of the year, so a business evaluation is very appropriate to do. Here are 4 steps to evaluate a business through financial reports so that your business can grow and advance.
Evaluation of Company Performance through Income Statement
To evaluate a business through financial reports, the first thing you can do is look at the income statement. By looking at the income statement, you can assess or evaluate financial performance during a period. To do this, look at the information on the income statement such as the amount of profit/loss, details of income, details of expenses. Then, calculate and analyze financial ratios such as profitability, efficiency, ROI (return on investment), earnings per share, and others.
In addition to the company’s financial performance, through the income statement, you can also assess the risk of your business. Look at the profit earned every month or from year to year. Make a simple graph and analysis, will the profits increase or decrease? If it continues to decline, you need to find out the cause. Because companies or businesses that continue to experience losses have a greater risk of bankruptcy. Before it’s too late, then find a solution quickly and precisely. So you can minimize the risk of loss and increase your income in the next period.
Monitor Changes in Capital by Reporting Changes in Capital
As we know, the report on changes in the capital is a financial statement that provides information about changes in capital resulting from the company’s operating activities during a period. Therefore, the statement of changes in the capital is closely related to the income statement. If your company gets a profit, the capital will increase, on the other hand, if the company experiences a loss, the company’s capital will also decrease.
The components of the report on changes in the capital are very small, consisting of only initial capital, additional investment, and resulting profit/loss, and prices. So that to judge it quite easily. All you need to do is monitor it periodically so you can find out the actual condition of your capital and changes in working capital that occur from period to period. You can also find out the funds generated during an accounting period through the change in the capital report.
Know Flexibility, Liquidity, and Solvency Through Balance Sheet Reports
The balance sheet consists of assets, debt, and capital so that it can show the company’s financial position for a certain period. Also, balance sheet financial statements can be used to analyze the flexibility, liquidity, and solvency of a company. Liquidity is the company’s ability to meet its short-term obligations. In other words, liquidity is used to determine the company’s cash availability. To calculate liquidity, you can use 4 types of ratios such as current ratio, cash ratio, quick ratio, and cash turn over ratio.
Flexibility is the company’s ability to provide cash for unexpected situations. So that by analyzing the balance sheet, you or the company can make decisions, where these decisions are related to actions in the next period. Meanwhile, solvency is the company’s ability to pay its debts according to the due date. To calculate it, you can use the debt ratio and debt to equity ratio.
Predict Future Cash with a Cash Flow Statement
As the name suggests, a cash flow financial statement is a report that provides information about cash receipts and payments in the company during a period. By evaluating cash flow, you can predict the company’s future cash flow. You can check the relationship between items, such as sales items and net cash flow from operating activities, or other ways, for example, to check the net cash flow from operating activities and increase or decrease in cash. So you can make better predictions for the amount, timing, and uncertainty of future cash flows. This method will be more effective than if you use accrual basis data.
Those are the 4 steps to evaluate a business through financial reports that you can do. To be able to evaluate using financial reports, of course, you also have to ensure that the financial statements made are correct and accurate. So that the evaluation results are following the conditions of your company. To make financial reports quickly, easily, and accurately you can use the help of accounting software.
The lead conversion squared is online accounting software that provides complete features for managing finances, from bookkeeping, invoicing, financial reports, and many others. With lead conversion squared, you can also monitor company finances anywhere and anytime, because lead conversion squared is cloud-based accounting software. For more information about the lead conversion squared software, you can follow 3 day master class here.