How to Analyze Financial Statements for a Corporation

4 Practical Ways to Understand What the Numbers Are Really Telling You

Once your financial statements are accurate, analysis is where the real value begins.

Financial analysis helps you move beyond simply recording numbers and start understanding what they say about profitability, cash flow, efficiency, and overall financial health. In this post, we’ll walk through four practical types of financial analysis used when reviewing corporate financial statements—and how they work together to tell the story of a business.

I’m Kerry Smithies from My Cloud Bookkeeping, and these are the exact approaches I use when helping business owners and leadership teams make sense of their numbers.

Step One: Start With Accuracy (Before You Analyze Anything)

Before doing any financial analysis, your reports must be accurate. That means:

• Income and expenses are categorized correctly
• Cost of goods sold is separated from operating expenses
• Balance sheet accounts are reconciled
• One-time or misallocated items have been reviewed
  

If accuracy isn’t confirmed first, analysis becomes misleading. I cover error-finding in a separate video, but once your statements are clean, you can move into true financial analysis.

Type 1: Horizontal Analysis (Looking Across Time)

Horizontal analysis compares financial results across periods, most commonly month by month.

A monthly profit and loss statement is one of the best places to start. It allows you to see:

• Trends in income
• Changes in cost of goods sold
• Fluctuations in expenses
• How net income evolves over time
  

Looking across months helps you understand why numbers change, not just that they change. For example, a sharp increase in revenue may come from a new service line, seasonal demand, or pricing changes. A drop might signal missed invoicing, timing issues, or declining sales.

Adding internal notes or comments when you spot changes is a powerful habit. It allows you to proactively document what’s happening instead of reacting later when questions come up.

Type 2: Gross Margin and Profitability Analysis

Once you understand revenue patterns, the next focus is profitability starting with gross margin.

Gross margin is calculated by subtracting cost of goods sold from income. It shows how much it costs to deliver your product or service before operating expenses.

This is one of the most important numbers in any business because it’s where you have the most control. Pricing, supplier costs, labor efficiency, and service mix all impact gross margin.

Operating expenses, by contrast, tend to be more stable month to month. Rent, insurance, utilities, and admin costs don’t usually fluctuate dramatically. If profitability needs improvement, the biggest leverage is almost always at the top of the income statement, not the bottom.

Type 3: Budget vs. Actual Analysis

Budget comparisons help answer one critical question: Did the business perform as expected?

Comparing actual results to budget allows you to see:

• Where income exceeded or missed expectations
• Which services or products drove the variance
• Whether expenses are tracking as planned
  

Operating expenses should typically align closely with budget. Large variances often signal timing issues, missing accruals, or misclassifications. Revenue and gross profit variances, on the other hand, often reveal strategic insights.

Budget analysis turns your financial statements into a management tool instead of a historical record.

Type 4: Vertical Analysis (Percent of Revenue)

Vertical analysis looks at each line on the income statement as a percentage of total revenue.

This makes it easier to:

• Compare performance across periods of different revenue levels
• Spot margin compression early
• Understand cost structure at a glance
  

For example, cost of goods sold might consistently represent 30% of revenue, while operating expenses consume another 69%, leaving only a small net margin. This perspective highlights whether profitability issues stem from pricing, delivery costs, or overhead.

Vertical analysis is especially useful for corporations with multiple income streams, as it shows which revenue sources carry higher margins and which dilute profitability.

Balance Sheet Ratios: Measuring Financial Health

Once income statement analysis is complete, the balance sheet provides insight into liquidity and financial stability.

Key ratios include:

• Liquidity ratios – How easily the business can meet short-term obligations
• Current ratio – Current assets compared to current liabilities
• Accounts receivable days – How long it takes to collect customer payments
• Accounts payable days – How long the business takes to pay suppliers
• Debt-to-equity ratio – How the business is financed
  

These ratios help identify cash flow risks even when profitability looks strong. A company can be profitable on paper and still struggle if receivables are slow or payables are stretched too far.

Bringing It All Together

Each type of analysis plays a role:

• Horizontal analysis shows trends
• Gross margin analysis highlights profitability drivers
• Budget comparisons reveal performance gaps
• Vertical analysis clarifies cost structure
• Balance sheet ratios measure financial resilience
  

Used together, these tools provide a clear, actionable picture of how a business is performing and where attention is needed next.

If this breakdown was helpful, I encourage you to watch the full video for a walkthrough of these analyses inside QuickBooks Online and Excel. Understanding your financial statements is one of the most powerful skills you can develop as a business owner or leader.

Cheers,

Kerry

Helpful Resources

Compare QuickBooks Online plans: https://www.mycloudbookkeeping.org/quickbooks-plan-comparison

Download the Small Business Month-End Checklist: https://learn.mycloudbookkeeping.org/small-business-month-end-checklist

How to Analyze Financial Statements For a Corporation - 4 Types of Financial Analyses

Today we’re looking at how to analyze financial statements for a corporation.

Once financial statements are accurate, analysis is how you start to understand what the numbers are actually telling you — about performance, profitability, cash flow, and overall financial health.

I’m Kerry Smithies from My Cloud Bookkeeping.
Let’s dive in.

So I'm working from a QuickBooks online sample company here today. And firstly, I wanna talk about two different types of analysis. There's an accounting analysis where we're typically looking to find errors and ensure that everything is accurate. I have a completely different video on that. It's called How to Find Errors in the Income Statement.

But here you can see we are looking at a profit and loss by month, and this is a perfect place to start. It allows you to kind of see right to the bottom for what your net income is across the months, and then of course, see the flow and understand the story of your business and the product.

It paints a picture of what's been happening. Now, once you have reviewed your financial statements and you're sure that they're accurate, this is the time that we start our financial management analysis, which is what we're talking about today. And once again, I would start with a month by month profit and loss.

As a quick refresher, the profit and loss we have, our income, our cost of goods sold, giving rise to our gross profit. We'll delve into that a little bit more shortly, and then our operating expenses. Now I'm gonna export this to Excel so that we can delve a little bit more into that gross profit.

So what I've done here is I have calculated, first of all, the change in sales month to month to month. We can see that in August, the sales were 17% higher than they were in July. In September, there was a 5% drop over August, October had a 9% increase from September, November a 243% increase, and then December it looks like it's missing some income.

It's down 78% you, I am working with a sample company here. So the actual numbers are less important than understanding the concept that this is a fantastic way to just see what's going on. Now, this comments column that I've created is something I would recommend that you do. You may be reporting to business owners, a board of directors, but anywhere you see a potential question investigated and make a note in the comments, it's much better to be proactive.

Understanding what's happening rather than reactive when you're asked these questions.

Now, this gross margin is hugely important. We get our gross profit by deducting the cost of goods sold from income. So you can see there's no cost of goods sold in July or August. However, in September. We do have some cost of goods sold that we're deducting from our income in order to get our gross profit.

And then in October, once again, we have some cost of labor here. We have design income. You know, it looks like there's some, there's some job expenses. It's a little spotty. November's got a lot going on, and we've ended up with a gross margin here of 73%. And December, we have no expenses, so we have a gross margin of 100%.

Now, overall in this six month period. The gross margin is 80%, which means it's costing us 20% to to provide the services we provide to our customers, and this is a very important number to keep an eye on. You always wanna know what your gross margin is because this is the area of the business where you have more control over the levers.

Now your total expenses here are operating expenses, which is different to the cost of goods sold expenses. It's important to keep those separate and typically these operating expenses are going to be.

The same month on month, you've already done your review for accuracy. I can see this insurance is out. It should be a prepaid and allocated. We are not delving into that in this exercise, but that's the sort of thing that you will have looked at before you're doing this analysis.

There's also some equipment rental here that I suspect should be included in the cost of goods sold, which would make so much more sense given that we have some income there. The margin would be a little bit off, but these are the types of things that will just become very routine to you when you looking at your numbers more regularly.

The next thing you're going to want to do is run your budget and compare it to the actual amounts for the same period. You'll see I'm using July to December because I'm in a sample company that only has July to December numbers in it. But you would decide what period you wanted to compare to your budget.

You may be doing it quarterly. It might be a year to date. It could be month on month. We can see here that we'd. Budgeted for $9,000 in income. We have 15,000. It's mostly because of the design income is where the increase is. Once again, make some comments, understand why, what's going on, what have we done?

More design work what caused this change from the budget? Whether it's good or bad, the gross profit is much higher because most of that design income appears to have flowed directly through. There isn't a lot of difference in what we budgeted for our cost of goods sold. I.

When we take a look at the expenses, you can see that we had budgeted for 11,900, and you can see we budgeted for 12,000 and. Our actual expenses are 11,979, so we're pretty on track there. Uh, the main variance is in the automobile. We budgeted 900, only spent 4 63. And then legal and professional fees, we spent less than we budgeted, but overall there's also an adjustment there for utilities is is different, but overall our expenses are pretty on track with what we budgeted.

And one would expect that with the operating expenses, they should not be wildly fluctuating.

Now we're gonna take a look at the profit and loss. We're gonna do what we call vertical analysis. When we looked at the profit and loss by month, that's referred to as horizontal analysis, which kind of makes sense 'cause we're looking across the months. But now we're going to look at all of the items on our profit and loss as a percentage of our sales.

Now if we have a look here, obviously the total income is 100% of the total income. We take a look next at our cost of goods sold. Our gross margin is coming in at 70%. Now that's different to that spreadsheet I had. I'm thinking I must have changed something while we were doing this. So please just do bear with me.

And the cost of goods sold is coming in at. 30%. So this is a very useful report for looking at margin, managing that top section of the income statement.

It's also interesting of this income to be able to see the breakdown, and we have design income coming in 45% of our income landscaping services, 43%. And then the products that we're selling, you know, seven, 8%. This split could also be useful information if you're building out different divisions or looking to expand certain types of work.

Our expense percentage comes in at almost exactly our gross margin, which is not surprising given that we have a net income of 1%, $192. Uh, it's interesting because as I mentioned previously. These expenses tend to be flat. So if you are looking to increase your profitability, the top part of your income statement is where you have the most power.

You can change the types of services you're offering. You can change your prices. You can look at the cost of your cost of goods sold. What you wanna be doing is ensuring that your gross profit covers your operating expenses, and then some. That's really where those drivers for the business happen.

There's a limit to what you can change within those operating expenses. Insurance costs, what it costs unless you wanna move rent is gonna cost what it costs. So those are the types of things that are a lot more difficult to have a huge impact with saving paperclips compared to getting a better deal with the supplier, it's going to have a much greater impact.

Now, anyone who's seen my videos before knows how much. I love to look at the balance sheet. But given that this is not an accounting analysis, we've already checked the accuracy of our balance sheet and we're carrying out financial analysis, we're going to run some ratios. From the numbers on the balance sheet to give us some more indicators of how healthy our business is.

There's a download below for this worksheet if that is something you'd like to have. The first place we start, of course, was with our liquidity. How much money do we have in the bank? How much money do we have coming in from our customers, and what do we owe this company? The sample company has $17,000 of cash in the bank and accounts receivable and owes only $1,700.

This tell this calculates as 9.6 or $9 60 for every $1 we owe. So clearly cash flow is not an issue here. Our current ratio takes into account. All current assets and all current liabilities, so a lot less liquid, but even so, we have $2 90 in assets for every, uh, dollar of current liabilities.

So you can see there should be no problems meeting the liabilities as they, uh, stand now. Now, the accounts receivable days outstanding is interesting if you get your accounts receivable. Compare it to credit sales, and I've used it for our six month period, 183 days. You come out with a number of 106.2, which is telling me it's taking 106 days to collect our sales.

Obviously that is not an ideal number and it's a good thing to keep an eye on. Even if you're as liquid as you are in this example, you don't wanna be leaving your accounts receivable uncollected for that length of time. The accounts payable days outstanding. A similar story. Um, I've assumed for the sake of this exercise, the cost of goods sold are credit purchases.

Obviously that's an oversimplification, but. Take into account all of the items that you purchase on credit. What is the current accounts payable number of days? And we're seeing that we're paying our suppliers in 95 days, which is obviously not acceptable. If somebody owed me money for 95 days, I think I'd stop working with them,

these are great numbers to keep an eye on as you manage cash flow and your business.

The final ratio we'll be exploring today is the debt to equity ratio. This compares the total liabilities to the total equity, and it gives a picture into how the business has been financed. Now, typically equity is going to be share capital preferred shares,

whereas your liabilities, of course is notes payable, uh, mortgages, anything where you're using debt. Uh, the total liabilities of course also does include the accounts payable that we're clearly utilizing to, to manage our business. So these are the ratios via from the balance sheet,

our profitability ratios we looked at earlier where , we're looking at our gross margin. Then also, of course, the percentage of costs. From our operating expenses, and this all flows into the profit and loss, which obviously has the same number down the bottom. But then we get to the vertical analysis where we compare everything to income.

So from our horizontal analysis to. Comparison to budget, to our vertical analysis and ratios. This gives you a really clear picture of the business.

If this was helpful, like and subscribe, and check out the link below.

Cheers.

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