How to write a financial analysis report for your business
Are you a finance student? Or are you passionate about business and investing? If your answer is yes, then you should appreciate the effectiveness of a good financial analysis report. Be it in your education or your investing activities, you need a deep understanding of how to write a financial report analysis. To begin with, you need to be conversant with the company’s operations and its commercial accounts to ensure that your financial analysis report is comprehensive and accurate. Investors rely heavily on financial analysis reports to gain insights into the company’s performance and growth before investing. Users of the reports also get a clear idea of the company’s potential as well as its financial position. Therefore, before you begin writing a financial analysis report, you should appreciate that its users will be interested in knowing the company’s financial health, economic strengths and weaknesses, and growth potential among other things.
The reasons you should learn how to write a financial report analysis for your company
Although it might seem technical to write a financial analysis paper for many people, it remains one of the key success tools for businesses. As a finance student you should develop the skills required through practicals on financial statement analysis paper. Here are several reasons why you should learn how to write a financial analysis report.
- Helps in decision-making: Accurate financial statement analysis plays an important role in the decision-making process. Internal and external stakeholders depend on the reports to make key decisions. For example, the company employees, who are internal stakeholders, will use the reports to decide on their future in the company. Investors will use the information to decide whether they would invest in the company.
- Used by lending institutions: Lending institutions such as banks will use the information as a guide to determine the financial health of the company. The institutions will determine the creditworthiness of the borrowing entity and its ability to pay based on its financial performance.
- Show trends in growth and performance: The company executives and owners use the information to see the trends from one financial period to the other. They can determine whether they have achieved the desired financial position or projections.
What is the process of writing a financial analysis report?
Since financial analysis is integral in showing the financial health of the company, it should address several aspects that include the following.
- Operational efficiency
- Capital Efficiency and Solvency
Revenues provide a clear picture of a company’s financial health since it is its main source of cash. This aspect of financial analysis helps the users of financial information to determine how well a company is performing in comparison to its peers in the industry. A good financial analysis report should include several calculations in determining the revenue stream of the company.
- Revenue growth. Perhaps, revenue growth is one of the most important components of revenue analysis. Investors, as well as the owners of the business, would be interested in understanding the company’s revenue growth to make investment decisions. Revenue growth is computed and presented in percentage form as follows. (revenue this period – revenue last period) ÷ revenue last period= Revenue growth in percentage
- Revenue concentration. Under financial concentration, you will compute the revenue generated per customer. This is an important aspect since it will help you understand if your revenue streams are generated from one customer. If that is the case, your business might be at risk if the consumer stops buying. You may use the following formula to compute revenue generated per customer. (revenue from client ÷ total revenue)
- Revenue generated per worker. This aspect is integral for the company since it shows the company’s productivity. The higher the ratio the better the company’s productivity. You may use the following formula to compute the ratio. (revenue ÷ average number of employees)
Online writing services provide an avenue for learners to understand the concepts of financial analysis reports. Engaging experts in the subject through the platform will allow you to gain in-depth knowledge on how to write financial analysis papers. You will get the opportunity to understand the different financial statements that measure your company’s performance from different aspects. If you visit a high quality custom essay writing service, you will engage professionals who will guide you through computations involved in financial analysis such as ratios. They will outline numerous tips that will help you master the concepts. Besides, they will provide you with numerous samples to improve your skills. You will understand the different ways you could present a financial analysis report.
This is another essential aspect you should address while writing a financial analysis report. The higher the profits the better for the company. A company that doesn’t generate adequate and consistent profits may be at risk of survival in the long run. Some of the aspects that you should include in your analysis are:
- Gross profit margin computed as (revenues – the cost of goods sold) ÷ revenues
- Operating profit margin computed as (revenues – the cost of goods sold – operating expenses) ÷ revenues
- Net profit margin computed as (revenues – the cost of goods sold – operating expenses – all other expenses) ÷ revenues
This aspect allows you and other users of your financial information on how well the company is utilizing its resources. If your company’s operational efficiency is high, then the company’s growth will be strong and profits will remain high.
Some of the aspects you should include here are:
- Accounts receivables turnover: it shows how well the company is managing credit extended to consumers. It is computed as follows: (net credit sales ÷ average accounts receivable)
- Inventory turnover: it shows you how efficiently your company is managing its inventory. It is computed as follows: (cost of goods sold ÷ average inventory). The higher the rate, the better the efficiency.
Capital Efficiency and Solvency
This aspect of your financial analysis is important for potential lenders and investors. It shows how well the company is managing its capital. Some of the ratios that you could compute here include:
- Return on equity: this ratio indicates the returns that investors are generating from your business. It is computed as follows: (net income ÷ shareholder’s equity).
- Debt-to-equity: This ratio indicates how much debt you’re using to operate. It is computed as (debt ÷ equity).
This aspect investigates your company’s ability to generate adequate financial resources to cover cash expenses. It involves:
- Current ratio: the ratio measures your business’s ability to pay off its short-term obligations. If the ratio is below the value of one, it means the business is not generating adequate resources and has poor liquidity. It is computed as follows: (current assets ÷ current liabilities)
- Interest coverage: The ratio will help you to measure your ability to pay interest expenses from the cash you generate. If you find a value of below 1.5, you should know it is a cause for concern by lenders. It is computed as follows: earnings before interest and taxes ÷ interest expense.