As a business owner, you should know about the different types of financial evaluations that can give you some insight into your business's overall performance and value. But what are these evaluations, and what do they involve?

Here's an overview of the four most common types of financial evaluations.

1. Financial Statement Analysis

To perform a financial statement analysis, your CPA will take a close look at your business's financial statements, such as your balance sheet and income statement. They'll also analyze any other financial documents you have, such as bank statements and tax returns.

The CPA will use this information to identify any areas of concern or opportunity. For example, they might notice that you hardly take advantage of certain tax deductions, something that could cost you a ton of money.

Your CPA will also look at your company's trends over time to identify any areas of concern. For example, if your business's expenses gradually increase while the revenue remains flat, this discrepancy could be a red flag that shows when your business is in trouble. In other words, your operational costs are out of control, and your business doesn't generate enough revenue to cover them.

2. Financial Ratio Analysis

Here, your CPA will compare your business's financial ratios to see if they match the industry standards. Financial ratios are a way of measuring different aspects of your business's financial health.

For example, your CPA might look at your business's debt-to-equity ratio. This ratio measures how much debt your business has compared to the amount of equity (i.e., ownership stake) that stakeholders have in the business.

A high debt-to-equity ratio could be a sign that your business has way too much debt and could be in financial trouble. On the other hand, a low debt-to-equity ratio indicates that your business growth is slower than it should be. This situation happens when you don't use leverage (i.e., debt) to finance your growth.

Your CPA can also look at other financial ratios, such as your operating expense ratio and your gross margin percentage. These ratios can give insights into how well you manage your business and if the company generates enough profit per financial year.

3. Business Valuation Analysis

A business valuation is an estimate of what your business is worth. This analysis can be useful if you plan to sell your business or take on investors.

To perform a business valuation, your CPA will look at various factors, such as the value of your assets, the profitability of your business, and the growth potential of your industry. They'll also consider any intangible factors, like the value of your brand or how strong your customer relationships are.

Once they have all this information, they'll use the data to come up with an estimate of what your business is worth. This value can be helpful when you begin negotiations with potential buyers or investors. The analysis can give you a starting point for the price that you should be willing to accept.

4. Cash Flow Analysis

A cash flow analysis assesses your business's ability to generate and maintain enough cash to cover its expenses. Remember that even profitable companies can run into trouble if they don't have enough cash on hand to pay their bills.

To perform a cash flow analysis, your CPA will look at how much cash comes in and goes out of your business. This information gives them a picture of your business's overall financial health. The analysis helps the CPA identify any areas where you might need to improve your cash flow. You can collect receivables more quickly or reduce inventory levels to achieve reasonable cash flow.

These are just a few of the many forms of financial evaluations that a CPA can perform for your business. If you're not sure which ones would be most helpful, talk to us at Bliss & Skeen, CPAs so we can help you figure out what's right for your business