How to Determine the Financial Position of a Company in 2025

Determining a company’s financial position is essential for understanding its overall health, stability, and growth potential. It provides key insights into profitability, liquidity, solvency, and operational efficiency, allowing stakeholders to make informed decisions. This process involves analyzing financial statements such as the balance sheet, income statement, and cash flow statement, which offer a detailed view of assets, liabilities, revenues, and expenses. 

By assessing critical financial ratios and trends, businesses can identify strengths, weaknesses, and areas for improvement. Whether you’re an investor evaluating opportunities, a business owner planning strategies, or a lender assessing risk, understanding a company’s financial position is crucial for confidently navigating today’s competitive and dynamic economic environment.

This blog discusses how to determine a company's financial position and how this helps identify its profitability and growth potential through informed decision-making and strategic planning.

5 Best Ways to Determine the Financial Position of Your Business

Here are the five key methods that can help you assess your financial position and make informed decisions to drive success:

1. Analyze Financial Statements and Ratios

It is important to create accurate financial statements such as balance sheets and income and expenditure statements and calculate ratios like gross profit, net profit, earnings before interest, taxes, depreciation, amortization (EBITDA), etc. This will tell you if your business is making a profit or a loss.

Even if the enterprise is making a profit, it must be assessed whether it is still in the black after paying off its interest and tax obligations, calculating depreciation, and meeting other overhead expenses. Some companies have gross profits but net losses on their financial statements. Some companies might even show earnings before their final tax payments and interest obligations have been calculated. However, the figures do not look so impressive once the EBITDA numbers come in. These are all numbers that the business needs to be aware of.

2. Analyze Revenue and Accounts Receivable Cycle

A company's financial health relies heavily on its ability to maintain liquidity and generate consistent revenue. Liquidity ensures that a business can meet its short-term obligations, depending on how efficiently the accounts receivable cycle is managed. Timely payments from debtors are crucial for maintaining a steady cash flow. Late payments or bad debts can disrupt the working capital, leading to operational challenges.

Additionally, stable revenue generation is a key indicator of financial performance. Businesses must evaluate whether their revenues consistently exceed expenses and whether those revenues are derived from core business operations, such as selling products or services. Temporary gains, such as fixed asset sales, should not be considered a reliable revenue stream. By analyzing the revenue and accounts receivable cycle, companies can ensure they have the liquidity and operational stability required for growth and resilience.

3. Analyze Inventory and Investment

Efficient resource management is vital for maintaining profitability and operational success. Businesses must continuously monitor their inventory, raw materials, and capital investments to ensure these resources are utilized effectively and generate the desired output. A thorough analysis validates the relationship between input investments and the resulting output, such as finished goods and sales revenue.

Key metrics to assess include the proportion of wastage, the quantity of finished goods produced, and the volume of products successfully sold in the market. Significant disparities between these numbers, such as high wastage or unsold inventory, may indicate inefficiencies in production, overstocking, or poor demand forecasting. These inefficiencies increase costs and tie up valuable capital that could be used elsewhere. Regularly analyzing inventory and investments helps businesses minimize waste, optimize resource allocation, and ensure smoother operations for sustained profitability.

4. Check Expenses

Keeping business expenses under control is essential for maintaining profitability and ensuring long-term financial stability. Regularly reviewing expense trends can help identify areas of concern. If expenses are consistently rising, it’s critical to investigate the root causes by consulting with operational heads or department managers. Understanding why costs increase allows you to take corrective measures before escalating further.

When analyzing rising expenses, it’s important to distinguish between one-time costs, such as equipment upgrades or unexpected repairs, and recurring expenses, which could signal a problematic or irreversible trend. Persistent cost increases might be due to inefficiencies, supplier price hikes, or mismanagement within specific areas. By delving deeper into these figures and addressing the underlying causes, businesses can create effective strategies to curb unnecessary expenditures, improve cost-efficiency, and ensure resources are allocated to drive growth and value creation.

5. Analyze Liabilities and Capital

A critical aspect of determining a company's financial health is examining its liabilities and capital structure. This involves evaluating the company's borrowings, the proportion of shareholder's equity, and the owner’s capital. Understanding the balance between debt and equity is crucial, as it directly impacts financial stability and control over the business.

High borrowings can be risky, as they come with increased interest obligations, which can strain cash flow and limit profitability. The more the company borrows, the more pressure it has to service debt, potentially reducing financial flexibility. On the other hand, a higher proportion of shareholder equity means more outside investors have stakes in the business, which can dilute the original owners' control and influence over decision-making. Additionally, higher equity could mean more frequent dividend payments to shareholders, impacting available capital for reinvestment.

Common Pitfalls to Avoid When Analyzing Financial Health

When assessing a company's financial health, it's important to know the potential pitfalls that can skew the analysis and lead to inaccurate conclusions. Here are some key mistakes to avoid:

• Overlooking Non-Recurring Expenses: It’s easy to be misled by a sudden spike in one-time or irregular expenses. For instance, legal fees or equipment purchases may temporarily inflate costs, distorting the business's true financial health. Always separate recurring expenses from one-off items for an accurate picture.
• Ignoring Seasonal Variations: Many businesses experience seasonal fluctuations in revenue and expenses. Failing to account for these cyclical changes can give a misleading impression of financial performance. Always analyze trends over a longer period to ensure you're not misinterpreting short-term variances.
• Focusing Solely on Profits: While profitability is a key metric, it’s not the only indicator of financial health. Focusing too heavily on profit margins without considering cash flow, liquidity, and debt management can lead to overlooking critical financial stress points.
• Misinterpreting Financial Ratios: Financial ratios are useful tools but must be analyzed in context. For instance, a high debt-to-equity ratio could be concerning if a company struggles to service debt, or it could be a strategic decision for growth. Without understanding the business strategy and industry context, ratios can be misleading.
• Failure to Consider External Factors: External factors such as market conditions, regulatory changes, or economic shifts can significantly impact performance. Neglecting to consider these factors can lead to unrealistic expectations or missed risks.

Conclusion

Determining a company’s financial position can be complex, especially for businesses with limited in-house financial expertise or resources. A lack of specialized knowledge can lead to poor decision-making, as time constraints can hinder the ability to analyze financial data accurately. Small—to medium-sized businesses with limited personnel can also experience delays in accurate financial evaluation.

Delegating financial analysis needs to experts ensures a solution to these issues by providing access to specialized expertise, cutting-edge technology, and accurate data. This allows businesses to focus on their core operations while ensuring that their financial position is assessed by experts who can provide valuable insights and ensure compliance with regulatory standards.

At Invensis, we offer tailored financial analysis and reporting services to help businesses understand their current business flow and future insights. Our team of experienced professionals uses the latest tools and methodologies to ensure accurate and timely assessments and help businesses make better strategic decisions. Contact us now to utilize our experience and expertise to enhance your business’s financial health, optimize operations, and achieve long-term growth.