Financial Analysis

Financial analysis makes up an extremely important part of any business plan. If you are producing your business plan for borrow or investment, potential lenders or investors will want to understand the financial performance of the business over at least the past 12 months of trading.

A lender or investor will typically look at several key areas. These will normally include: the viability of the proposal, this will consider a number of factors, including the ability of the company to meet the proposed repayment (if required), as well as the stability of the financials for the company. Profitability will also be considered, and lenders and investors will normally look at reliance on one particular customer, as well as market analysis and profit margins.

As part of the financial analysis process, the company should display the following areas:

Profitability: The businesses ability to earn and sustain income growth in short and long term outlook. This would normally be an extract from the businesses income statement, which would form part of the accounts.

Solvency: Lenders will look at a businesses ability to meet the requirements of creditors and other third parties, as well as creditor days (i.e the number of days it takes to pay), as well the impact that any further facilities would have on the solvency of the business.

Liquidity: A businesses ability to maintain a positive cash flow, at the same time satisfying its obligations, both immediately and long term.

These latter two areas, are based on a businesses balance sheet, which provides an indication of the financial condition of a business. The important thing to consider that typically this will only be at a given point of time, and clearly if there has been a substantial change since the balance sheet was produced, these figures could display extremely differently.

Stability: This is the firms ability to continue trading in the long run, and being able to not incur significant losses through its ongoing trade. This will normally consider a number of different factors, including the profit and loss as well as the balance sheet, as well as a number of additional indicators.

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