The Importance of Financial Statement Analysis in Strategic Planning

Financial statement analysis is an unskippable step in the strategic planning process. It is an evaluation of your company’s past and current performance, present financial position, and future performance and risk. The importance of this analysis cannot be underestimated. Neglecting this vital step often results in overestimated goals, unnecessary spending, loss of strategic direction, and even business failures. In this blog post, we define the role of financial statement analysis and provide common analytical practices for your business to conduct in the strategic planning process. 

The Role of Financial Statement Analysis

The role of financial statement analysis is to provide your business with information to improve efficiency and effectiveness in delivering products and services. Whether your business wants to launch new products and services, expand operations across the nation, or merge or acquire another business, financial statement analysis identifies implications for the strategic planning process to happen. Without financial statement analysis, businesses often get lost in the weeds and make decisions without a quantifiable basis. As a result, financial analysis is the core of all business decisions. Analysis of each financial statement is conducted alongside the strengths, weaknesses, opportunities, and threats (SWOT) analysis. They compare internal, competitor, and industry performance as benchmarks with regard to economic conditions such as inflation. 

1. Horizontal Analysis: Displays financial condition and performance across fiscal years, such as revenue growth and loss over a period of three years.

2. Vertical Analysis: Ties the percentage of specific financial line items to a base amount, such as the percentage of expenses dedicated to office expenses over three years. 

3. Ratio Analysis: Measures key relationships between financial statement items, such as the comparison of current assets to current liabilities over five years.

The Role of Ratio Analysis in Financial Statement Analysis

Ratio analysis often uncovers conditions and trends difficult to detect by inspecting individual line items. It tracks liquidity and efficiency, solvency, profitability, and market prospects. These analyses are vital to determine if your business can pay short-term and long-term obligations with cash, equity, or debt financing; utilize its assets effectively; and generate adequate returns on investments. Market prospects apply to publicly traded companies and assess the risk of buying and selling their stock. 

Implications of Financial Statement Analysis for the Strategic Planning Process

With the financial statement analysis report, businesses make judgements about areas of strengths, weaknesses, opportunities, and threats. Your business can determine if it has the financial resources available to take on a growth strategy through the implications of financial statement analysis. Poor cash flow management, lack of profitability, and high risk of defaulting on long-term debt are a few common reasons businesses fail to move further in the strategic planning process. However, these issues can be remedied by precise, calculated budgeting. 

How Atlas Services can Help

At Atlas Services, we help businesses strategize for success. Our team of skilled professionals provide financial analysis services, budget consulting, cash flow forecasts, merger & acquisition due diligence, and more. Your business’ finances are in good hands, so that you can focus on the strategic planning process. 

Financial statement analysis is essential. It cannot be underestimated for its role in the strategic planning process. Through Atlas Services, your business will be set up for financial success in whatever growth strategy you pursue. Check out what services we offer and contact us today to learn more about how we can help your business strategize for success!