How often do you review your business numbers? If you look at the financial performance of your business at least once a month or perhaps even more frequently, you’re in good shape—and better off than most businesses.
Unfortunately, too many businesses review their books only every few months, and frankly, that’s not a great strategy. It gives those businesses fewer opportunities to see if things are going well or not. The more frequently you review your business finances, the more chances you have to find opportunities for growth.
But how do you approach reviewing your financials? What documents should you analyze? What exactly should you be looking for? Let’s try to answer those questions by introducing you to a process known as a strategic financial analysis.
What is a strategic financial analysis?
A strategic financial analysis is a review framework where you analyze performance, assess your goals, and make adjustments to your forecasts and strategy based on actual results. In short, this is where you connect the dots between your numbers and the actions that you’re taking. The intention is to identify any potential problems or opportunities within your financials and turn them into strategic steps for growth.
In some cases, this analysis may also include a deeper look at your business model, comparisons against your competitors, and even different forecast scenarios.
What financial statements should I review when conducting a strategic financial analysis?
When you’re reviewing your business financials, you’ll want to check these three key reports:
- Profit and loss (also known as an income statement)
- Cash flow
- Balance sheet
Each report will tell you different things about your business. Put together, they’ll provide you with nearly everything you’ll want to know about your business performance. By the end, you should be able to bring your forecasts for these statements up to speed based on your actual results.
How to conduct a strategic financial analysis
Here are the five steps you’ll want to take when conducting a strategic analysis of your financial statements.
1. Compare your forecast to your actuals monthly
So, if you’re reviewing your business financials regularly, you’re off to a good start.
But to get even more value out of that financial review, you need to start comparing your actuals—how your business performed—to your forecast.
Ideally, compare your plan to what actually happens in a monthly meeting with your key staff. You’ll want to have your forecast handy as well as reports from your accounting software so you can compare the two and see if you’re on track.
If you’re using LivePlan, the software will do all of the number-crunching and comparison work for you—no spreadsheets required—and you’ll be able to compare everything in a simple financial dashboard.
2. Identify where you’re off track or exceeding projections
When you’re forecasting, you’re making educated guesses. This means that your actual financial performance in a given month will vary.
You’ll typically either be off track and performing worse than expected. On track and sitting fairly close to expectations. Or, outperforming your forecasts and exceeding expectations.
What does comparing my plan to my actual results do for me?
If you just review what happened in the past, you’ll get a good idea of what happened during the past month of your business. But, it’s difficult to know if your performance is good or bad if you’re not comparing your actual results against your plan.
- How do you know if you’re meeting your sales goals?
- Can you tell that you’re keeping your spending within your budget?
- Are you keeping as much cash in the bank as you need to?
Even more importantly, if you have plans to grow your business or make significant investments, you’ll want to know if it makes financial sense to spend the money. Should you invest now or should you wait for a better time? Should you open a second location or hold off?
By reviewing your plan and comparing it to your actual results, you’ll get a better sense of when you should look to expand, and when you should be reining things in. Make a mistake and invest in your business at the wrong time and you could create a cash flow crunch that could sink your business.
3. Review your Income statement (profit and loss or P&L)
Your income statement (also called profit and loss or P&L) documents your income and your expenses. When you compare this statement to your forecast, you’ll see if your sales are meeting your goals and if you’re keeping your expenses in line with your budget.
If you’re not sure what’s included in an income statement or what types of information you’ll find there, start with this guide to reading a profit and loss or income statement that will help orient you to each line item.
You can also download an income statement example to help you better visualize the information. For a more dynamic solution that displays actual results for completed periods right into your forecasted Profit and Loss statement, check out LivePlan’s LiveForecast feature. No more hours spent inputting accounting information. Just you spending more time digging into what is and isn’t working for your business.
When you’re ready to dive deeper and start your income statement analysis, use this income statement analysis guide for your monthly financial review. It walks you through typical questions that might come up as you’re doing your review. That way, you can use your findings to make better strategic decisions for the health and growth of your business.
4. Analyze your cash flow statement
Your cash flow statement will tell you exactly how cash moved into and out of your business. Comparing this statement to your cash flow forecast will tell you if you’re on track to grow your bank balance the way you had planned, and why you might be off track if things aren’t going the way you had hoped.
Check out this article on how to read a cash flow statement for a line-by-line explanation of how it works. And download our cash flow statement example PDF and Excel spreadsheet if you’re looking for a sample to work from as you review your own.
When you’re ready to start comparing your actual cash flow to your forecast, this guide to cash flow analysis will help you get started.
5. Review your balance sheet
Your balance sheet will give you a complete overview of your financial position. How much money are you owed and how much money do you owe? What assets does your business have? Your balance sheet analysis will help you understand if you’re collecting money from your customers at the right rate, and if you’re taking on more debt than planned.
If you’re new to balance sheet review, this article offers more insight on how a balance sheet is set up, and what you need to know about each line. You can also download a balance sheet example to help you visualize it better.
When you’re ready to do your monthly review, this balance sheet analysis guide will help you get started.
Look beyond your financials for more insights
Doing a monthly financial statement analysis—comparing your actuals to your plan or forecast—helps you keep a finger on the pulse of your business finances.
Additionally, it’s wise to look at industry benchmarks, financial shifts in your industry, and any other external factors that may be affecting your financial performance. Use your initial comparison to actual performance to jumpstart this market analysis and help you define the next steps.
When you identify a gap or variance between what you forecast and what actually happened, use that information to help you make strategic shifts in your business so you can quickly address challenges and take advantage of opportunities.
Editors’ note: This article was originally published in 2019 and updated for 2021.
Noah Parsons
Noah is currently the COO at Palo Alto Software, makers of the online business plan app LivePlan.
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