Evaluating financial performance and position is a business activity that is important for both business owners as well as for anyone who is thinking about buying or otherwise investing in a company. The idea is to make sure the business is financially stable, is well placed within its market, and has an acceptable level of growth opportunity for the future. In order to determine if this set of circumstances exists, it is important to look closely at where the company has been, where it is now, and where it is likely to move in the future.
Begin your financial performance and position evaluation by collecting all the background information on the subject company that you can find. You want to understand what opportunities and challenges the company has faced in the past, and how the business was able to make the most of those opportunities and build a loyal clientele even in the face of some setbacks and challenges. By knowing how the company arrived at its present position in the marketplace, it is easier to get an idea of how it performs in various economic climates and thus have some clues as to how the company would fare in the future.
Once you have a good idea of how the business came together and managed in the past, focus your attention on what is happening in the here and now. With this part of your financial performance and position evaluation, the idea is to compare how the company is doing today with what you know of the past performance. Look closely at current sales figures and market share, and determine if the company is holding its own, losing some ground, or continuing to expand that revenue stream and increase its market share. Also look closely at the current cash reserves, real estate, and other assets held by the business in comparison to any outstanding indebtedness. Consider shifts in the economy that are occurring now which could be driving sales up or down. Essentially, a company that is able to hold its own during tough economic times is likely to be very stable and worth looking into further.
With all the data you’ve collected, turn your attention to the future prospects of the company. Consider what will likely happen to the financial performance and position of the business if the current economic circumstances continue for the next one to five years, as well as what could happen if there is some sort of economic shift. Often, the historical data that shows how the company managed in changing economic conditions in the past can be related to future performance. With those projections in mind, owners can plan future strategies, investors can decide if the anticipated returns are sufficient to merit purchasing stocks, and potential buyers can determine if the financial performance and position evaluation indicate that making a bid to buy the business is a viable option.