Business Star Makers

How do we Evaluate the Financial Performance of our Global Business?

Daniel Davidson, MD, MBA, DBA, PHD

Introduction:

Assessing the financial performance of your company is crucial for knowing its state, making wise choices, and creating long-term plans. To evaluate profitability, liquidity, efficiency, and solvency, this procedure entails examining a variety of financial statements and important measures. This is a thorough article on assessing your company’s financial performance.

Examine the financial statements:

Statement of Income
The income statement, sometimes known as the profit and loss statement, gives a concise overview of the receipts and outlays for your company for a given time frame, usually a quarter or a year. Important elements consist of:


Revenue is the total money received from the sale of products or services.
Direct expenses related to the creation of items sold are included in the cost of goods sold (COGS).
Revenue less COGS equals gross profit.
Operating expenses are expenses incurred on a daily basis for things like rent, utilities, and payroll.
Net profit is the remaining amount after deducting operational costs and taxes from gross profit.

Balance Study
A snapshot of your company’s financial situation at a particular moment is given by the balance sheet. It consists of:


Assets are the resources that a business owns, including money, stock, and real estate.
Liabilities:

Debts that a company has, including loans and accounts payable.
Equity is the owner’s stake in the company, which is determined by subtracting liabilities from assets.

Statement of Cash Flow
The cash inflows and outflows over a certain time period are monitored by the cash flow statement. There are three portions to it:

Operating Activities:

The money made or spent on regular company activities.
Investing Activities:

The use of cash from asset sales or investments in assets.
Cash received from or paid to creditors and investors is referred to as financing activities.

Examine Important Financial and Profitability Ratios
These ratios evaluate your profit-generating capacity in relation to equity, assets, and sales.

Margin of Gross Profit:

The ratio of gross profit to revenue. It gauges how effectively a business manufactures items.
Divide operating income by revenue to get operating profit margin. It shows the portion of revenue that remains after operating costs are paid.
Divided by revenue, net profit is known as net profit margin. It displays the total profitability following all costs.

Ratios of Liquidity
Your capacity to fulfill immediate obligations is assessed using liquidity ratios.

Divide current assets by current liabilities to get the current ratio. A ratio higher than one means there are enough assets to pay off creditors.
Quick Ratio is calculated by dividing current liabilities by current assets (less inventory). Because inventory is not included in this ratio, a stricter measure of liquidity is provided.

Ratios of Efficiency
These ratios show how well your company uses its resources.

Inventory Turnover is calculated by dividing COGS by average stock. It displays the frequency of sales and replacements of inventory over time.
Revenue divided by average accounts receivable is known as Receivables Turnover. It shows the effectiveness of your receivables collection. Ratio of Solvency
The ability to fulfill long-term obligations is evaluated by solvency ratios.

Liabilities totals divided by equity is the debt to equity ratio. It shows how much finance is provided by debt versus equity.
Divided by interest expense, operating income is the interest coverage ratio. It gauges how much operating income you have available to pay interest.

Examine in Relation to Benchmarks

Industry-specific Averages
To evaluate your success in comparison to peers, compare your financial statistics with industry averages. This can help you see your strengths and places for development.

Past Achievements
Examine patterns by contrasting present financial data with historical results. This makes it easier to spot growth trends and problem areas.

Assess Cash Flow Management

Effective management of cash flow is essential to the financial well-being of your company. When your business manages its cash flow well, it can invest in growth prospects, satisfy short-term obligations, and overcome financial difficulties. Here is a thorough how-to guide for evaluating and efficiently managing your cash flow:

Recognize cash flow statements

The three elements that make up the cash flow statement offer insights into various facets of your cash flow:

Operating Activities:

The cash inflows and outflows from your primary business operations, such as sales receipts, supplier payments, and payroll, are tracked in this section. A positive cash flow from operating activities shows that the day-to-day operations of your business are generating enough cash flow.

Investing Activities:

The money acquired from the sale of assets, such as real estate, machinery, or securities, or utilized to invest in assets is tracked in this area. You can determine how much money your company is investing in its future expansion by carefully examining this area.
Financing Activities:

The cash flows from debt issuance and repayment, dividend payments, and share issuance are included in this section. It offers information about the financing and debt management capabilities of your company.

Regularly check cash flow
To practice proactive financial management, you must regularly check your cash flow. To keep track of your company’s liquidity condition, set up a regular review schedule for cash flow data, such as weekly or monthly.

Make cash flow estimates in order to project future inflows and outflows of cash. This enables you to budget appropriately and foresee cash surpluses or shortages.
Cash Flow Budgets:

Create a budget for your predicted inflows and outflows of cash. Your investment and spending decisions can be guided by this tool.

Handle the Payments and Receipt
To keep a healthy cash flow, accounts receivable and payable must be managed well.

Accounts Receivable:

Put techniques in place to hasten the collection of funds. This entails establishing explicit terms for payment, providing early payment reductions, and swiftly following up on past-due invoices.
Payables:

Control your payment dates to maximize your cash flow. Utilize the terms of payment that suppliers give, but refrain from making late payments since they could result in fines or strained relationships.

Streamline the Process of Inventory Management
Cash flow is immediately affected by inventory management. While having too little inventory can result in missed sales, having too much inventory can tie up funds that could be spent elsewhere.

Inventory Turnover:

To make sure you are effectively managing stock levels, keep an eye on your inventory turnover ratio. Strive to keep a perfect equilibrium that satisfies consumer demand without going overboard.
Just-In-Time (JIT) Inventory: To cut expenses and free up funds, think about putting in place a just-in-time (JIT) inventory system.

Evaluate Financial Health Holistically

The overall health of your company might be affected by qualitative elements that are just as important to take into account as the quantitative study of financial statements and ratios. A comprehensive assessment takes into account both specific financial information and more general contextual factors to provide you a complete picture of your business’s financial health.

Situation of the Market
Recognize the business climate that your company operates in. The way you perform financially can be greatly impacted by various factors, including industry dynamics, economic cycles, and market movements. It’s easier to foresee developments that can affect your firm if you keep up with these situations.

Competitive Environment
Analyze your standing in relation to rivals. Understanding market share, competitive advantages, and any dangers from advances or new competitors are all part of this. Better financial health is frequently correlated with a good competitive position.

Client Satisfaction
Recurring business, positive word-of-mouth, and brand loyalty are all correlated with high customer satisfaction levels and financial stability. Gather and evaluate client input on a regular basis to determine areas for improvement and to determine level of satisfaction. Employee Engagement
Happy and engaged workers produce more, improve the workplace atmosphere, and are less inclined to quit, which lowers turnover expenses. Survey employees and fund programs that increase happiness and engagement.

Creativity and Flexibility
Analyze how well your business can innovate and adjust to changes. Enterprises that possess the ability to promptly adapt to innovations in technology, alterations in customer inclinations, and disturbances in the market are inclined to sustain their long-term fiscal stability.

Conclusion

Assessing your company’s financial performance is a complex procedure that includes benchmark comparison, key ratio calculations, and financial statement analysis. Frequent financial analysis facilitates better decision-making, increased operational effectiveness, and long-term planning. You can make sure that your company is successful and sustainable in the long run by keeping a close eye on your financial performance.

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top