Analysing business account

 In fact, we should call this Part as a business analysis. In the Financial data section, we dealt with the basic accounting documentation, which consists of the balance sheet, the income statement and the Cash Flow statement.
Just to repeat, the balance sheet shows the company's financial position at a given point in time. It's a sort of photo of time. It is an overview of the assets owned by the company at that moment and an adequate overview of the resources they are funded.

It also gives us a clear answer to whether the company is solvent. The profit and loss account shows what profit or loss the company generates for a given period of time – usually a month, a quarter or a year. Cash flow shows "inflow and outflow" of finances to and from the company, according to business development.

If you have practice reading the accounting documentation, you can calculate many useful indicators from these numbers. If you want to know how you're doing with your business, you can ask a wide range of questions like:

  • "is achieved profit a company great or small?"
  • "Is the company's debt level still healthy or unhealthy?"
  • "How much will I get back from the deposited crown to the business?"

Moreover, an annual comparison of these indicators indicates where our business is going and where possible to concentrate our efforts for improvement. In addition, we can study the results of competitors, where they have strengths and weaknesses, and react accordingly. But what I'm talking about is useless, unless we can calculate these ratios and then interpret them properly.  The instrument for measuring various ratios between the numbers of the financial statements are the so-called Ratios.

Ratios are used to compare the company's performance over a given period, say the last month, last quarter, last year with another and also as a benchmark as the company conducts with regard to competition. Of course, in the same industry. It is also possible to check how the company is performing towards its objectives or how the budget targets are filled up. Yes, from a financial point of view, the possibility to calculate ratios is an excellent thing, but to identify and calculate the useful and key is no longer so easy. 

Examine for example these two tables:

 After changes our tables may look like this:

This is nothing more than a simple income statement – the table on the left and part of the balance sheet describing the company's assets – the table on the right.

Any change that increase net income (more sales, lower costs, lower taxes, etc.) but not increase of assets employed (non-monetary change) (e.g. debt reduction, lower stocks, etc.) will increases the profitability Of assets – ROA (Retun Of Assets). On the contrary, any change that requires an increase in the capital employed without an adequate increasing the company's profits decreases the profitability of the assets.

A little preliminary explanation - what ROA indicator is:

We can calculate it according to the formula:

ROA = Net Income after tax / Total assets (or Average Total assets)

Return on assets (ROA) is a financial ratio that shows the percentage of profit that a company earns in relation to its overall resources (total assets). Return on assets is a key profitability ratio which measures the amount of profit made by a company per dollar of its assets. It shows the company's ability to generate profits before leverage, rather than by using leverage.

In other words, and very simplistically, this indicator tells us how much of the invested dollar into the business we get back to our own account.
Suppose we succeeded:

  • Increase sales by 1 000 € to 7 000 €
  • and increase profit by 40 € to 444 €

At first glance, it looks great. We're growing profitable!

But let's try to look a little closer. To achieve the increase the profit it was needed: 

  • Buy new equipment - price 200 €
  • Another 100 € is tied in working capital (stocks, loans)

Then the numbers don't look so attractive.

Our tables may look after a change such as this:

 The return on capital will be reduced from 33% = (10110/30280 * 100) 


29% = (11 110/(30280 + 5000 + 2500) * 100).

From 1 € Now we will not get back 33 cents, but only 29!

As you can see, we rejoice prematurely. This simple example shows how good it is to be able to understand and interpret correctly the financial results of the company. You don't have to be a knowledgeable economist at all. He will help you to calculate the results, or you can use the appropriate software to do this based on your accounting documentation. You just must realize what the numbers about my business eventually says. 

This section of our website with this can help you.