While the basic financial statements – balance sheet, income statement, and cash flow statement - will provide you with valuable information, there are a number of other types of comparisons and analysis you can perform that can give you insights into how you can better manage your business and improve your profitability.
Analysis of the Composition of the Balance Sheet
The balance sheet can be broken down into groups of accounts. A comparative analysis of the percentage relationships of the different groups of accounts that make up assets, liabilities, and equity can serve to detect, control, and manage trends or shifts in the composition of your net business resources.
The asset side of the balance sheet can be broken down into:
Cash and cash equivalents, such as deposits and liquid marketable securities,
Realizable assets, including short-term investments, trade accounts receivable from customers or clients, and other receivables,
Inventories, and
Fixed assets.
The liabilities and equity side can be separated into:
Short-term liabilities (payable within one year),
Long-term debt (payable beyond one year), and
Owner’s equity.
Vertical Analysis
A vertical analysis can then be done by calculating the percentage that each group of assets represents in terms of total assets, and that each group of liabilities and equity represents in terms of total liabilities and equity. A graph of these relationships may be useful for visualizing the relationships.
This vertical analysis will provide you with an idea of where your resources are invested. If your business requires a significant portion of your resources to be liquid, for example, your analysis will probably show a strong percentage in cash and cash equivalents. If it does not, you may need to evaluate ways of freeing up more resources. If the level of inventory you carry is a significant aspect of your business, you will probably want to closely monitor how much of your resources are invested in inventory.
On the liability side, if you have a relatively rapid turnover of working capital, current liabilities will probably be significant. If your business is more capital intensive, with a significant investment in fixed assets, your long-term debt may be a more significant portion of total liabilities.
And while the amount of owner’s equity will vary depending on how your business is financed, how profitable your business has been, and how you distribute earnings, owner’s equity should be maintained at a level that is appropriate for the financial health and solvency of your business.