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January 30, 2020

The Financial Analysis: what it is, and why every small business owner should be doing it

Regardless of the industry, successful business owners share some common traits. They are open-minded, adaptable, tech-friendly, and they surround themselves with strong partners, including financial advisors. They also understand why, and how, their business is profitable through regular evaluation of their finances. Angelo DeCesaris, Vice-President and Business Relationship Manager at Fidelity Bank in Kingston, explains the basics of financial analysis and why regular evaluation is critical to the success of every small business.

What is a financial analysis?

A financial analysis is the process of evaluating the financial performance of a business. The results give business owners insight into whether or not their company is profitable, and why. There are many ways to approach this process, depending on the type of business and the size of the company. For example, it can be broken down by project, or by location, if there are multiple locations. Regardless of the approach, Angelo explained it’s important to drill down into the details of the company’s finances to get an accurate picture of its finances. “To me, this is truly the most important part of your business other than actually finding your customers,” Angelo said. Financial analysis is the lifeblood of the business. It’s understanding how or where you make money, or lose money.”

A financial analysis includes a review of the following:

  • Did it increase? Decrease? Remain Stable? Why did this happen?
  • Gross profit margin. Gross profit margin is a metric used to assess a company’s financial state by revealing the amount of money left over from sales after deducting the cost of goods sold (COGS). The gross profit margin is often expressed as a percentage of sales and may be called the gross margin ratio. Is it increasing? Decreasing? Why?
  • Operating expenses. Salaries, benefits, and the operations of a company fall into this category. Review this line by line.
  • Net income. Is it positive? Negative? How does it compare, year-over-year?

How often should a financial analysis be done?

Monthly. Don’t wait until tax time to review finances. By then, it’s too late. “That year is already gone, and you’re 3 or 4 months into the next year. If you lost money, you may end up losing money 2 years in a row,” Angelo said.  A better strategy is to get into the habit of doing a financial analysis once a month. It all starts with collecting accurate data to compare monthly financials, and review year-over-year, and year–to-date figures.

Documents and data

Gathering accurate data is the only way to make informed business decisions. Helpful documentation may include:

  • Profit and loss statement (also known as an income statement). The basic equation of the profit and loss statement is: revenue minus expenses equals profit or loss. The profit and loss statement shows revenues, expenses, and profit for a particular period. It indicates if a business is profitable at that point.
  • Balance sheet. A balance sheet is a snapshot of a company’s financial status at a particular point. It is organized into two main columns: assets in one column, and liabilities and equity in the other. The two sides always equal each other. Assets equal equity minus liabilities.
  • Cash flow statement. The cash flow statement shows the movements of cash and cash equivalents in and out of the business. It can show a profit on the income statement while draining cash from the business.

The power of ‘Why?’

Asking why a business is – or isn’t – profitable is a vital part of financial analysis. “When you’re reviewing finances on a monthly basis, you also want to review the data year-over-year. Many businesses are seasonal. So just comparing it to the previous month may not give you an accurate picture. I suggest looking year-over-year, too,” Angelo said. For example, a comparison of November 2018 to November 2019 would include a monthly analysis as well as a year-over- year evaluation, and a year-to-date comparison. “Look for anything that jumps out at you. If something is significantly higher or significantly lower, ask ‘why?’ and dig deeper with that. Some things we can control, some things we cannot. If you’re losing money on a particular project or customer, do you want to do more business with them with the same pricing?”

While many business owners would answer ‘no’ to that question, some may have a good reason to say ‘yes.’ If the project allows them to get a foot in the door with a company that will yield profitable projects in the future, maybe it’s worth it to continue doing business with them. “If you look at the entire picture and take a holistic view, it may be ok to lose money on this particular project because, in the greater scheme of things, it’s better for the company overall,” Angelo said. These are the types of issues to discuss with a trusted financial advisor.

Another scenario – a great one – is discovering the reason behind a boost in profits. “Maybe your business is extremely profitable, but you don’t know why. That profit and loss statement will give you information that you need to understand why your business is profitable. Maybe your cost of goods sold is way down. You may want to ask why. You want to investigate whether it’s you, or your accounting department, or something internal to your organization. You need to understand how you make money.”

Embrace technology. Be willing to adapt. Find the right partners.

“In today’s world, especially with technology, the one constant is change. If you were in the retail business 10 years ago, chances are you were affected by Amazon. There are companies in that space performing very well that go head-to-head with Amazon because they’ve changed.  They’ve adapted, and they understand their marketplace,” Angelo said.

Many small business owners may not have the resources to hire a Chief Financial Officer (CFO) or Controller, so they fulfill these roles. Embracing technology can be a tremendous help in this situation. Angelo recommends investing in accounting software, and keeping it up to date. This enables business owners to access information they need for a financial analysis quickly and accurately. “How can you make a business decision if you don’t have all the facts? That’s extremely important. Successful companies are managed by business owners who understand their business, and understand where they make money, and how they make money.”

A healthy discussion of trends and future action can only take place if the business owner provides an accurate profit and loss statement (income statement) and a balance sheet. Accounting software can help them access this information.

Are there parts of the business that could be automated? “Prior to 2008, a company may have had 10 people doing 10 tasks. Then the Great Recession came, and companies had to become more efficient. Suddenly, there were 4 people doing 11 or 12 tasks. So it’s important to consider how you can bring technology into your business to become more efficient, specifically with banking. What are you doing manually that you could automate? Does your bank have the technology to work directly with your accounting software, and communicate directly instead of making it a manual process? That’s all part of it. By automating that portion of the business, it will give you the information you need to do your financial analysis. You’ll save time and money, your records will be more accurate. The benefits are endless.”

Successful business owners adopt new ways to operate and embrace technology to grow their business, and become more profitable. “Increasing efficiency and automating functions allows key personnel to do what they do best,” Angelo said. “In many ways, that’s growing their business. If you have individuals who want to grow and add value to the company and now you’re freeing them from doing a mundane task that you can automate, it allows them to grow, learn, and add value. That benefits the entire company.”

Finding the right partners is also key. “Meet with your Banker or accountant on a quarterly basis and ask for their input,” Angelo said. “I try to be an advisor, so when I ask for financial statements to do a financial analysis, I’ll say, ‘I notice there’s been a change. Why? What was this attributed to? By no means am I trying to tell someone how to run their business. I just help them understand where they were, where they are, and where they want to be, and offer them guidance on how to get there.”

Learn More

Fidelity Bank has built a strong history as trusted advisors to the customers served and is proud to be an active member of the community of Northeastern Pennsylvania. With branches located throughout Northeastern Pennsylvania and the Lehigh Valley, Fidelity Bank offers full-service Trust & Investment Departments, a mortgage center, and an array of personal and business banking products and services. The Bank provides 24 hour, 7 day a week service to customers through a variety of digital banking tools, branch offices, online at, and through the Customer Care Center at 1-800-388-4380.