Running a business involves balancing multiple responsibilities, meaning you're often stretched for time. Between juggling clients, managing staff, and keeping on top of day-to-day operations, it's all too easy for financial reviews to take a backseat. Furthermore, the uncertainty of how to do a financial review often means it gets pushed even further down the to-do list.
However, ensuring your business stays on track financially is essential for long-term success. So, in this blog, we're offering some help. Read on as we break down how to do a financial review step by step.
What is a Financial Review?
First, let's address the basics. In simple terms, a financial review is a health check for your business. It involves analysing your financial records to assess your business's performance, identify potential risks, and make informed decisions. Think of it as a way to zoom out and look at the bigger picture while pinpointing areas that need improvement.
Why is a Financial Review Important?
There are several key benefits to doing a regular financial review. For example, it will help you:
- Spot cash flow issues early, allowing you to address any shortfalls before they become significant problems.
- Identify inefficiencies by determining any areas where you're overspending or not getting enough return on investment.
- Stay compliant by ensuring you're up to date with tax obligations and financial regulations.
- Plan for growth, using your understanding of your financial position to make strategic investments.
How to do a financial review for your business
Now that we've conveyed the importance of doing a regular financial review for your business, let's take a look at some steps you can take to make this a straightforward process.
Step 1: Gather Your Financial Documents
Start by collecting all your key financial records. These typically include:
Having all your documents in one place will make the review process much smoother. Accounting software is invaluable in this process, so it is worth considering if you don't already work with one of the platforms available.
Use the information from these documents to carry out the actions in the remaining steps.
Step 2: Review Your Revenue Streams
Take a close look at your revenue streams. Identify where your sales are coming from, which areas are performing well, and which are profitable. Other things to evaluate are if there are any seasonal trends or dips in income and whether you have any opportunities to diversify or increase revenue.
Understanding your revenue patterns will help you identify which areas to focus on and which require action.
Step 3: Assess Your Expenses
Next, meticulously go through your expenses. Categorise them into fixed costs (like rent and utilities) and variable costs (like marketing or raw materials).
The key objective here is to understand if there are any unnecessary expenses you can cut. Consider whether you are getting value for money from your suppliers and if you could renegotiate contracts to make savings.
If you take the time to do this step thoroughly, it can often uncover hidden costs that are eating into your profits.
Step 4: Analyse Your Cash Flow
Cash flow refers to the money that moves into and out of your business. A healthy cash flow is vital to successful operations. It ensures you can cover expenses and invest in growth opportunities.
When reviewing cash flow, check your incoming and outgoing cash for consistency, identifying any periods of low cash flow and their causes. If you can, have an emergency fund to access for unexpected expenses. If cash flow is an issue, it may be worth consulting a financial expert for advice on improving it.
Step 5: Monitor Your Key Performance Indicators (KPIs)
Financial KPIs provide valuable insights into your business's health. Examples of useful KPIs include:
- Gross profit margin
- Net profit margin
- Debt-to-equity ratio
- Customer acquisition costs
- Return on investment (ROI)
Regularly tracking these metrics will help you measure your progress and adjust your strategy as needed.
Step 6: Forecast for the Future
A financial review isn't just about looking at past performance; it's also about planning ahead and creating realistic financial projections for the next quarter or year.
When making these projections, consider factors such as expected changes in revenue or expenses, new investments or projects, and external factors such as economic conditions or market trends.
A solid forecast can guide your decision-making and keep you prepared for challenges.
Step 7: Seek Professional Advice
While conducting a financial review on your own is a great start, a professional's perspective is invaluable. At Keith Graham, our team of experienced accountants can provide an objective view of your business's financial health and offer tailored advice to support its growth and profitability.
If you would like to find out more about our business accountancy services, please get in touch with our team.