Information seen clearly is like a well-lit room. Just printing down the financial statement and scanning the content is merely the start. You must be able to look at your information differently to reveal meaning and provide answers to questions that can improve your cash flow and bottom line.
Methods such as common size analysis, where you analyze line-items on your income statement as a percentage of net revenue can reveal absolute growth or declines. Common size analysis can also prove up trends and allow the entrepreneur to set proper expectations in the future. Ratio analysis basically marries the balance sheet and the income statement. Ratios can provide insightful information merging information on the balance sheet and income statement to produce statistics that define your true financial position and operating results. Cash flow analysis will define where your funds are actually being received and being spent.
Drill down analysis takes you to your underlying support to the financial boundaries. Drilling down can lead you to a collaborated analysis such as Google analytics, revenue realization analysis, and your CRM system that can be very revealing to support your resulting of operations.
Always remember, however, you must have sound financial records to start this process. It is like starting a journey without a roadmap. A bad framework will not provide valid information to analyze. So if the information is bad the results can be totally miss-interpreted which will lead to the wrong path.
You can analyze and quantify the results of your actions through your financial data to make prompt and accurate business decisions. For you to really know what is fueling your business you need to understand the effects of your financial activity and the results it is driving. This will be the first of a series of blogs on how to implement and engineer this process.