Income Statement Analysis

An income statement includes revenue, expenses and profit earned over a period of time.

The income statement generally starts with the revenue earned for a specific period minus the cost of production for goods sold to determine the gross profit. It then subtracts all other expenses, including staff salaries, rent, building utilities, and non-cash expenses to determine the earnings before interest and tax. Finally, it subtracts money paid for interest and tax to determine the net profit that remains for owners. This money can be paid out as dividends or reinvested back into the company.

The income statement provides information on a company’s financial health by helping you analyze the following:

• Revenue growth throughout certain periods of time

• Gross profit margin

• Percentage of revenue resulting in net profit

Balance Sheet Analysis

The balance sheet is a statement that shows a company’s financial position at a specific point in time. It provides a snapshot of its assets, liabilities, and owners’ equity.

Assets are what a fire protection company uses to operate its business. Liabilities refer to money that is owed to others (think accounts payable) or borrowed from other sources (think debt). Owners’ equity represents the financing put into the business by the owner(s). Keep in mind that assets should always be equal to the sum of liabilities and owners’ equity.

The balance sheet provides information on a fire protection company’s financial health by helping you analyze the following:

• Accounts Receivable Aging and Days Sales Outstanding ("DSO") - how old are your accounts receivable and how long does it take you to convert revenue to cash (DSO)

• Length of outstanding AP balances or Days Payable Outstanding

• How long it takes to sell in-stock inventory

Cash Flow Analysis

The cash flow statement provides insights into how a company used its cash. It shows the sources of cash flow and different areas where money was spent.

The cash flow statement is one of the most important documents used to analyze a fire protection company’s financial wellbeing since it provides key insights into the company’s cash generation and use of cash. Cash flow statements exist because they remove the impacts of non-cash transactions and provide a far clearer picture of the company’s financial health.

The cash flow statement provides information on a company’s financial health by helping you analyze the following:

• Company's liquidity situation

• Sources of cash

• Free cash flow the company generates

• Increase or decrease in cash

Financial Ratios

Financial ratios help you make sense of the numbers presented in financial statements. The ratios are powerful tools for determining the overall financial health of your fire protection company.

Some of the financial ratios you should know include:

• Gross profit margin. The percentage of profit the company generates after direct cost of sales expenses have been deducted from the revenue

• Net profit margin. The percentage of profit the company generates after all expenses have been deducted from revenue, including interest and tax from revenue

• EBITDA. Earnings before Interest, Taxes, Depreciation and Amortization. This is usually the key earnings metric used for private companies.

• Coverage ratio. The company’s ability to meet its financial obligations, specifically to cover its debt and related interest payments

• Debt-to-equity ratio. The percentage of debt versus equity that the company uses to finance itself

• Return on assets (ROA). The company’s ability to manage and use its assets to earn profit

Financial ratios should be compared across periods, and no single ratio is sufficient to analyze the overall financial health of your organization. Instead, a combination of ratio analyses across all statements should be used. 

Beyond Financial Numbers

Financial numbers are highly important, but operational metrics also play a role in your fire protection company’s financial wellbeing. It is important to consider the following operational aspects of your company when evaluating its financial health:

• Sales. Track the work already signed but not yet billed/produced and the prospective work in the sales process. These are important because they give you a forecast for what’s to come with the revenue.

• Revenue by Customer. Analyze this to understand if you are well diversified from a customer perspective. How much revenue are you generating from your top customers? Are you tied to one industry or multiple industries? These are all good questions to understand and be able to speak to.

• Production. How is your fire protection company using its resources? Track the utilization of your resources to measure its efficiency.

• Human Resources. Track employee engagement either through anonymous comments/suggestions or through “Town Hall” meetings.

• Customer Satisfaction. Track results from Net Promoter Score surveys to see how your team is doing and serving your customers.

Understanding your fire protection company’s financial wellbeing is highly important especially going into this new year. You never know what business offers you will be approached with that you want to take to the next level. All information you learn from evaluating your financial statements and operational aspects may ultimately benefit your business, employees, customers, and career.