Financial statements, which include a balance sheet, income statement, statement of cash flow and disclosure notes, are prepared by CPAs for businesses. Businesses request financial statements for various reasons such as obtaining financing and bonding, banking requirements and shareholder information. The information contained in financial statements is also useful when conducting a financial analysis of the business and comparing its performance from one year to the next. The analysis also allows for easier comparisons between the business and its competitors.
Prepare two Excel spreadsheets using the data from the financial statements--one for the balance sheet and another for the income statement. Next to each item presented for the balance sheet, calculate the value as a percent of total assets. For example, divide the total cash by the total assets and enter the value, as a percent, next to the dollar value of total cash. Repeat the calculations for the income statement by dividing each item by total revenue. These are called common-size financial statements.
Compare your company’s common-size financial statements to other companies in the industry. Removing the dollar value of assets, liabilities, income and expenses allows focus to shift to the percentage of each item as it relates to the overall financial picture of a company. Falling outside the benchmarks of your industry will indicate areas that need cutbacks or expansion.
Create a spreadsheet that calculates ratios applicable to your business. Most businesses benefit from calculating and comparing working capital (current assets less current liabilities), total assets divided by total debt and current ratio (current assets divided by current liabilities). Compare the ratios over time and to your industry.
Update and analyze the data regularly. If CPA-prepared financial statements are only done on an annual basis, ask your CPA if your accounting system (i.e., QuickBooks) can generate financial statements that would be useful for internal analysis. Frequent analysis of financial statements is paramount to identifying unusual trends and declines in business.