Did you know that your financial data/statements are the building blocks to the success of your business, regardless of size? Especially if they are detailed, precise and updated regularly—you can effectively use this critical information to help your SME company scale up and gather funds for its current and future financing needs.
In this blog post, we will discuss the significant financial data/statements that investors, creditors and lending institutions will evaluate as part of your application process to get business funding. In addition, we will also tackle the different financial ratios relevant for evaluation.
Gathering Business Funds: Financial Data/Statements Your Business Should Have
Your balance sheet refers to the financial condition or health of your business. It contains details about what it owns and owes, which is crucial to understanding if your business can repay its loan. There are three portions in a balance sheet which include equity, assets and liabilities. Investors and lenders will look at your balance sheet and income statement to pinpoint how much of an investment in assets and liabilities is needed to maintain your lucrative business.
Note that your balance sheet is only an overview of your business assets, liabilities, equity and debt. It does not showcase what happened in the period that caused your business to get to its present state. Hence, the profit figures found in your income statement are also required. This can help investors and lenders analyse the past performance of your business and identify its future cash flows.
Cash Flow Statement
A report or data showing the inflow and outflow of money in your business is known as Cash Flow Statement (CFS). This gives investors and lenders an idea of how well your business manages its resources and whether you have enough cash to cover your bills or expenses. A cash flow statement analysis contains three primary headings: Operating, Financing and Investing.
Statement of Equity
Also called a Statement of Shareholders’ Equity, this financial data highlights the retained earnings and profit kept within your business. It also showcases how much your business can pay its debts and reinvest. Likewise, it is said that a business with a steady increase in retained earnings is sustainable as compared to an increasing shareholder base.
How Investors and Lenders Interpret Your Business Financial Data / Statements Using Financial Ratio Analysis Approach
Defining Financial Ratios
With the enormous amount of financial data submitted by companies when applying for funding—financial ratios are a way to measure how well a business performs based on these data. Financial Ratios can help investors and other lending institutions identify potential problem areas, and make better investment decisions. In addition, it provides insight into the operational efficiency, effectiveness of management, indebtedness and profitability of a business.
Here are some of the most common financial ratios that investors and other lending markets utilise to interpret the financial data/statements of a business.
These financial metrics calculate how your business can handle its cash flow and short-term debts without raising extra capital from external sources. Examples of liquidity ratios include liquidity index, current ratio, cash coverage ratio and quick ratio.
These financial metrics assess how well your business can generate profit or earnings. Investors/lenders will get a better sense of your business performance by comparing ratios of the same period. To illustrate, comparing the second quarter of this year with the same quarter from last year will provide a better result.
Examples of profitability ratios include net profit ratio, gross profit ratio, contribution margin ratio, return on operating assets, return on net assets, return on equity, the margin of safety and break-even point.
Also known as Valuation ratios, these financial metrics mainly focus on the stock price of your business and its perceived value in the market.
These financial metrics evaluate how your business performs short term and whether it can produce income through its assets.
Includes bonds issued by a company and borrowed funds from banks – these financial metrics examine the debt situation of your business and whether you can handle your debt servicing costs and outstanding debt.
These financial metrics examine the quality and performance of your business. Examples of activity ratios include working capital turnover ratio, sales-to-working capital ratio, inventory turnover ratio, accounts payable turnover ratio, accounts receivable turnover ratio and fixed asset turnover ratio.
The financial data/statements which contain salient information about the financial health, performance and activities of your business are extremely vital when gathering financial backups. Businesses that don’t have these statements can be at a disadvantage when negotiating with investors and creditors. So ensure you have accurate financial data to support your claims and win the favour of lending markets!