Lesson 3b – Ratio & Financial Analysis Part B

Ratio & Financial Analysis (A 2-Part Lesson)

Analyzing financial position provides a look at the past and is the first step in the financial management process. It is like taking a patient’s pulse and temperature. The analysis points out areas where there may be current or potential problems. It is somewhat fruitless to decide where you want to go until you have determined where you have been and where you are now.

This analysis is a quick, efficient tool for you to use in becoming familiar with the historical financial operation of your company. It is a framework for identifying the causes and severity of financial and management problems. When you act in your business, you can feel confident that the action is the right one. Ratio analysis pinpoints problems and helps you find hidden cash opportunities in your current business operation.

Here are the key learning objectives for this lesson:

Part A focuses on learning a methodology to quickly gauge the health of any company in less than 7 minutes. It is a technique Mike Milan calls Initial Financial Indicators or (IFI’s). This technique is the basis of one of his most popular speaking seminars called “The 7-Minute Conversation”.

Part B focuses on completing a more in depth financial analysis. The following 4 objectives will be learned.

  1. Test your company by calculating the key ratios of your business. This includes understanding how fast you convert assets to cash, how good are you at basic business processes, and are you really making money.
  2. Once you calculate key ratios, you will analyze the results. In most cases, ratios are just numbers. You will understand how to interpret their meaning.
  3. Analyzing the results is only half the battle, you have to diagnose the causes for any issues you identified. Learn how the ratios are interconnected and which one is the prime contributing factor for the problem.
  4. Lastly, you will learn how to treat the problem. This is the action you take to improve your company’s financial health.

The goal of this lesson is to bring your financial statements to life and minimize the guess work about why it doesn’t seem to be going in the right direction. Use this lesson as part of your monthly measurement of your financial reports.