The Importance of Financial Analysis in Company Management

Do you know how important it is to do a financial analysis of your company? Or how having reliable financial data helps you in making decisions? Or how important is your accounting in this regard?

If your answer is “no,” you do not have to worry. Most people in Wolrd do not use the financial analysis process. Sometimes for lack of knowledge of the existence of this process or for not knowing its real importance for the decision making of a company.

The Importance of Financial Analysis in Company Management

But financial analysis is a very useful process for you to leverage your business by attracting more customers and investors. Interested in the subject? Keep reading and know the importance of financial analysis in your company and how your accounting can help you!

 

The concept of financial analysis

Financial analysis, also known as economic analysis, is the study of a company\’s profit-generating ability. This is also a way to measure their development. Through it, we find methods that allow us to evaluate the financial situation of the business. The goal is to determine your performance for the best use of your resources.

We can thus measure the company\’s ability to generate profit through indicators. The same ones that will help us to see their real performance. Only then will we know if the company\’s finances will be positive or negative, helping us to make short, medium and long term decisions.

 

The importance of financial analysis

We note today that many companies are struggling to impose their business. These situations can be caused by several reasons. Some examples are internal problems of the institution itself, competitors or any other that comes from the momentary economic situation of the country. Some of the reasons that cause a company to lose income or generate a profit are maladministration, lack of experience and planning, lack of control of cash flow, lack of working capital, among others.

To be a good manager of the company it is imperative that he identifies his financial situation. In this way, one gains more facility and autonomy in the hour of the decision making in a short time. However, you need to identify your ability to keep accounts up to date and analyze your bottom line. Thus, it will be possible to identify the existing problems in the entity\’s economy.

It is extremely important that you leave your accounting data up to date. A good accountant can help you in this regard as the financial statements, as well as all data and information provided by accounting will help you identify any problems in financial management and then assist you in the future and immediate decision making of the company.

So with you doing financial analysis, seeing the strengths and weaknesses of the company\’s economy, you can develop methods to grow your business. For a company that has finances on the day passes a good image before the public. It will attract more customers and even investors, who will ensure the financial health of the entity.

 

How can I achieve financial equilibrium?

There are several ways or techniques through which we can compose the financial analysis of a company. But there are specific points that are simple and easy to assess.

A manager should always be on the lookout for improving their savings and making the best use of the institution\’s resources. Here are a few points where you can focus on and reduce the impacts of poor past choices, assessing your ability to generate profits and your stability.

Fixed cost

Also known as structural costs, are those that do not change their value in case of increase or decrease of production. In this case, it is essential for the maintenance and continuity of the company. Its monitoring should be regular, that is, it should be studied at all times, minimizing its impact. Examples of fixed costs: Security, Equipment Rentals, Cleaning, among others.

Variable cost

Those that vary according to the production, the volume produced or the sales volume, in a certain period of time, directly influencing the values of the products. Examples of variable costs: raw materials, sales commissions, inputs, among others.

Operating profit

This is nothing less than a calculation of profits after deducting all fixed and variable costs.

Contribution margin

This is the amount of money left over from Revenue that was earned through sales after withdrawal of variable costs and expenses. This enables a break-even and profitability analysis. The higher the positivity of this index, the better the health of your company.

Sales Price

This should be one of the first evaluations you should have. The prices of their products and services should contain a strategic action segment, taking into account the factors of competitiveness, consumer views, positions against competitors, profitability and demand for the product or service.

Revenues

Know your sales volume, knowing the demand for your services and products, how much and how much they are sold.

Growth

This is equivalent to the equity growth of your company, represented by the analysis of shareholders\’ equity, the growth of billing volumes and even the increase of the business structure.

 

Economic indicators

The economic indicators are used so that we can see how the financial health of the entity is going. Through them, performance comparisons are known over a period of time, evaluating the positivity of the choices made. Even showing possible errors, which can still be corrected and reducing their impact on the institution\’s economies. Below are some indicators that you should always be aware of to improve the financial/economic performance of your company:

Profitability and Profitability Index

It serves to demonstrate the ratio of operating profit to sales. They are quantitative measures, simple calculation. They relate to the variables of the companies\’ financial statements, mainly the Balance Sheet. Through this index, it is possible to know the ability to analyze the net profit of a company.

Liquidity Ratio

It evaluates how much the company can assume with its obligations. It is extremely important for the administration to give continuity to the institution. The information for the calculation is taken from the Balance Sheet, which must be constantly updated for a correct analysis of the accounting data.

Indebtedness index

It assesses the volume of debts with the capital of the company. Through it it is possible to monitor how much of the company\’s movements use third-party capital or are financed by the company\’s own capital.

The average payment term index

This metric is based on the average number of days the company takes until it can pay off its debts or obligations to suppliers.

The average term of receipt

This is the average number of days that the institution needs to wait until it receives the value of its sales.

 

How can an accountant help me?

Having good accounting will help you in many ways. There are two entities that can bankrupt your company: one is yourself and another is your accountant. Having bad accounting directly affects your company\’s data analysis. Thus, it is crucial that the assessment be clear and certain. For only then will we have the vision of how the profits and losses of the company are going.

There are several analyses that accountants carry out, which help the proper behavior that the company must follow to move towards its financial stability. The good accountant can help your life with the following actions:

Delivery of ancillary obligations

There are several ancillary obligations that your company must deliver during the year, which may vary for each type of company. Some examples are DAS, DASN, DIRF, among many others. If your accountant mistakenly delivers them or omits them, your company will be pending and this will influence the collection of fines and interest. But good accounting can take this headache from you.

Accounting Bookkeeping

Your company must have adequate bookkeeping. Your Daily Book should always be up to date, as it may be exposed to the intersection of information with the IRS. This will impact the analysis of Revenue in your cash flow. So they will check the source for all expenses, whether declared or not.

The IRS knows almost exactly the expenses of its members, as well as what are the expenses in credit card, goods, health, among others. Also knows the company\’s expenses with purchases, salaries, among others. Always remember that it is your responsibility to send the information and data appropriate for your accountant.

Cash flow

It is an instrument that assists in financial control. This feature allows you to analyze and monitor the company\’s actions of movement, with a list of inputs (revenues) and outputs (expenses). It will help you in making decisions and improve your financial performance. The cash flow will support you especially in expense management, financial control and decision-making process. Only a good accountant will analyze your financial data and organize it consistently, to the point that your company reaches financial equilibrium.

The issue of Nota Fiscal (NF)

Companies, both industry, commerce or services, need to make the issuance of NF-e (Electronic Invoice) . It is crucial that you issue correctly so that no problems occur with the Internal Revenue Service. In this way, it is possible to avoid risks that, when crossing information, there are omissions that arise in the supervision and in the assessment of the company.

Correct taxation

Choosing a tax regime is very important for your company to achieve the long-awaited success. A wrong choice will do you a significant loss, causing you to pay many taxes improperly, compromising the financial health of your business, even generating tax problems with Revenue.

There are three types of tax regimes that your company can choose: Simple National, Presumed Profit or Real Profit. It is advisable for an accountant to analyze the data and, with your experience, help you find the best option for your business.

We still have other methods of analysis through statements, in which an accountant can be very useful, helping the financial health of your company, such as the Balance Sheet, Income Statement, among others.

 

Influence of correct and reliable data in the company

Usually, we do not pay much attention to our company data. Often for lack of time or even for an oversight. But having reliable data helps us analyze the information, especially those related to finance, which are crucial to determining whether our decisions were positive or negative, even to see if any past action has led to an improvement in the company\’s economy. This way we can check for fraud or errors. It is worth remembering that only with reliable data can an accountant perform his work properly.

 

History of Financial Analysis

Today, although many people are misinformed and do not use the methods to do the financial analysis, we have a range of studies and techniques that we find easily in books, magazines and the internet. But do you know how financial analysis came about? And how important was it in the past? We will talk a little about this and how it has evolved to the present day. For only then can we have an in-depth notion of this method.

According to the historian Marion (2002), the history of the evolution of financial analysis began around 4000 BC In its primitive form are the first inventories of herds and the concern with their eventual loss. At this time people did not have a notion of calculation as advanced as we have today, not even currency to evaluate their goods. There was exchange and business was done through the evaluation of the traders themselves.

Thus, this would be a type of horizontal analysis, somewhat similar to what we now call the balance sheet, where we follow the period-to-period variation of an item. Thus, they were only relative values, since the quantities did not represent equivalent quantities.

Evolution for the present day

But at the end of the nineteenth century, the term balance sheet analysis came up, where bankers asked for statements from companies wishing to borrow.

Over time, other credit analysis and lending statements began to appear, with the statement of income for the year being developed in the United States in 1915, becoming mandatory within banking systems.

After a while, companies have made a public offering, allowing the participation of small and large investors as shareholders, thus requiring managers to assess the administrative efficiency and performance of their competitors. In this way, it was possible to understand the financial situation of the companies, consolidating the need to analyze the financial statements.

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