Many people say they don't know how to analyze a financial statement, from which aspects, and with what methods. The general methods of financial analysis mainly include trend analysis, ratio analysis, and factor analysis. It mainly analyzes from aspects such as the enterprise's solvency, operating capability, and profitability. Below, a diagram will help you understand financial statement analysis.

I found a very clear version of the diagram. Click the image to enlarge it. ▼▼

1. Basic Understanding of Accounting, Finance, and Management

  • Finance and accounting are quite different, but similar to management.
  • Accounting work is reliable statistics of management information.
  • Financial work is the analysis and application of accounting information.
  1. Profit and loss budget: The format is exactly the same as the income statement. Usually, a twelve-month budget for the next year is prepared each year. The principle of preparation is the actual figures of the current year plus the impact of business policies, so it is an expected achievable business target.
  2. Financial budget: This is the budget for assets and liabilities, usually expressed as a ratio to operating revenue, used to assess whether various assets and liabilities are in appropriate conditions.
  3. Investment budget: When increasing fixed assets, an investment budget should be prepared first to raise funds and prevent misuse of funds.
  4. Cash budget: This is the budget for cash (bank deposits), usually prepared for three months only, with the main purpose of collecting receivables and scheduling funds.

2. Understanding Accounting Subjects and Reading Financial Statements

  • Accounting subjects are statistical classifications of management information.
  • The constant relationships among accounting subjects:
  1. Revenue - Expenses = Profit/Loss
  2. Assets = Liabilities + Capital + Profit/Loss
  • Enterprise managers can request some special subjects:
  1. Classify large amounts into more detailed accounting subjects.
  2. Separate special costs from normal costs for exceptional management.
  3. Align expenses with the organization for budget management.
  4. Separate accounting subjects according to different purposes of use.
  • Use sub-accounts to produce detailed statements.

3. Assessing the Enterprise's Operating Capability from the Income Statement

  • General knowledge of the income statement:
  1. The first category is operating revenue.
  2. The second category is operating costs.
  3. The third category is operating expenses.
  4. The fourth category is non-operating income and expenses.
  • Read in comparison with the budget.
  • Break down subjects for easier analysis.

4. Understanding the Enterprise's Constitution from the Balance Sheet

  • Pay attention to hidden traps in the statement.
  • Balance safety and profitability.
  1. Balance between quick assets and current liabilities.
  2. Balance between inventory assets (finished goods, materials) and current liabilities.
  • Common balance principles for accounting subjects:
  1. Balance between inventory value and turnover.
  2. Balance between accounts receivable and sales.
  • The source and application of funds statement shows improvement or deterioration.
  • Reading the balance sheet is an important task.
  • Calculation and analysis of the source and application of funds statement.

5. The Meaning and Application of the Cash Flow Statement

  • Grasp the cash flow situation.
  • Three main parts of the cash flow statement:
  1. Changes in cash from operating activities.
  2. Cash inflows and outflows from investing activities.
  3. Cash inflows and outflows from financing activities.
  • Cash flow statement.
  • Keep cash inflows greater than outflows.

6. The Debit-Credit Concept and Application in the Accounting System

  • Debit-credit balance prevents omission of unilateral data.
  • Has internal control function to avoid malpractices.

7. Enterprises Have Three Sets of Books

  • Avoid endless troubles for temporary gains.
  • Understand the differences between tax accounting and other accounting.
  • The operational points of the three sets of books are different.
  • Management accounting requires timely bookkeeping.

8. Application of Standard Cost Accounting System

  • Clearly show the contribution to the enterprise.
  • Fully grasp the profitability situation.
  • Produce complete management effects.

9. Financial Analysis Methods for Investment

  • Financial analysis makes investment plans more concrete.
  • Break-even point sales = Total fixed costs / Gross margin.
  1. Solvency = (Current assets - Inventory assets) / Current liabilities.
  2. Operating capability = Inventory / Current liabilities.
  3. Collection capability = Accounts receivable / Average sales.
  4. Customer quality = Notes receivable / Average sales.
  5. Stability = Fixed assets / (Long-term liabilities + Capital).
  6. Profitability = Profit/Loss / Sales.

10. Mastering the Reading Essentials of Financial Reports An enterprise's monthly financial statements usually consist of three main tables: the income statement, the balance sheet, and the cash flow statement.

  • Pay attention to the increase or decrease and nature of income.
  • Note changes to judge the company's future.
  • Focus on where the profits have gone.
  • The preparation method of financial statements.
  • Master the essentials to read statements.

The way to read financial statements is to first look at the income statement to check whether any business or department has poor performance, affecting the company's profitability. Then look at the balance sheet to check whether the main asset and liability items are true, especially the inventory situation. Finally, look at the cash flow statement to see where the profits have gone.

-END-

The best learning platform for FMCG distributors in China. Focuses on providing professional, practical, and applicable tutorials for enterprises and distributors. Committed to helping Chinese FMCG distributors grow rapidly.

The most professional and practical knowledge base in the FMCG industry Reply with the red number below to get the corresponding content. Reply with number 1 to view the complete knowledge base. | 001 Excellent article selection | 002 Distributor market operation | 003 Terminal visit management | 004 Sales supervisor skills | 005 Sales improvement techniques | 006 Channel expansion | 007 Managing distributors | 008 Distributor development | 009 Distributor internal operations management | 010 Team management | 011 Efficient distribution techniques | 012 Sales manager's eighteen skills | 013 KA operation methods and strategies | 014 First lesson for new salespeople | 015 Internet, brands | 016 Distributor B2B transformation | [Long press QR code to follow]