To be sure your firm has sufficient resources to grow, a financial review provides a structured approach to assess how your firm performed financially in the past, as well as its current financial situation and potential risk exposure. Financial reviews are much more than just record-keeping, they are a review of historical financial performance, a review of your current financial situation, a review of your business’ liquidity, and a review of potential risks you face, such as regulatory violations. A financial review will help you identify problem areas, validate your strategic plan, and build credibility with investors.
If you do regular financial reviews, you’ll catch small problems early so they don’t become larger problems. Financial reviews give your senior leaders a solid foundation of information that enables them to make better-informed decisions.
1. Analyzing Profitability and Expense Patterns
When you conduct a financial review, you evaluate where your money is coming from (revenue) and where it is going (expenses). This helps you determine whether your income is increasing in line with your expenses.
Some common items reviewed in financial reviews include:
Gross and net profit margins
Fixed vs. variable costs
Concentration of revenues
Analyzing these items gives you a clear understanding of how to run your operations with greater discipline.
2. Evaluating Liquidity and Cash Flow
Your company’s ability to generate and manage cash is critical to your long-term success. A company may be highly profitable but still fail if it does not have sufficient liquidity to meet its short-term obligations.
Common items evaluated in a financial review include:
Trends in operating cash flows
Accounts receivable turnover
Short-term liabilities
Having strong liquidity reduces uncertainty and increases stability.
3. Identifying Potential Risks
The primary purpose of conducting a financial review is to identify areas of risk to your firm. Common areas of risk include excessive concentrations of debt, excessive dependence on suppliers or vendors, and/or declining profit margins.
Identifying potential risks early allows you to take corrective action before the damage occurs. Regular proactive monitoring helps protect your firm’s sustainability.
4. Supporting Strategic Decision Making
Financial reviews provide the basis for making educated decisions regarding future growth, hiring, investments, etc.
Financial reviews reduce reliance on assumptions and allow for better capital allocations.
Regular financial reviews enhance the clarity and confidence of your senior leadership.
Summary
In summary, understanding the financial review process and its importance will enable your firm to have better control over profitability, increased stability in terms of liquidity, improved risk management capabilities, and enhanced clarity in terms of strategic direction. Regular financial reviews transform raw financial data into meaningful, actionable information that can be used by your firm to achieve long-term sustainability and gain the confidence of stakeholders.