Why Financial Analysis And Payroll Compliance Are Critical In Business

Forbes

5 hours ago

Bree Manay, Managing Partner & CEO at Manay CPA.
Successful business management involves many moving pieces—not only leading a team but also accomplishing short- and long-term business goals aligned with a mission and vision. Within that bigger picture are the critical details, like the crunching of numbers, the analysis of financial performance and the overall health of the business. An effective, successful business runs in the black and takes careful measures to minimize its risk of falling into the red.
As a certified public accountant and tax coach, I've seen firsthand the importance of business leaders developing a strong understanding of their company's financial health while making present and future business decisions. This ensures the business is not only compliant with the law but also can remain successful and grow.
Business decisions that aim to earn money often cost money first. Before making such decisions, business owners need to evaluate their financial health and position to determine whether their choice will benefit or cost the business. This evaluative process often includes a financial statement analysis, which helps businesses set appropriate budgets and plan for the future.
There are three financial documents I recommend leaders familiarize themselves with: balance sheets, income statements and cash flow statements.
The balance sheet offers a preview of a business's assets, liabilities and equity at a specific point in time. It is organized so that total equity equals assets minus liabilities. Analyzing the balance sheet helps assess the business's risk, asset liquidity and ability to meet financial obligations. However, since it captures only one moment, it might not fully reflect the business's overall economic health.
The income statement, or profit and loss, summarizes a business's total revenue, expenses and net income for a specific time period, usually quarterly or annually, in my experience. Unlike a balance sheet, it focuses on a defined timeframe.
There are two primary methods for analyzing the income statement: vertical and horizontal analysis.
• Vertical analysis looks at a single column of data, calculating percentages and relationships between line items, such as expenses compared to total operating expenses. This helps identify performance trends.
• Horizontal analysis compares line item values over time to reveal trends, highlighting growth patterns and the impact of specific items on financial performance.
The cash flow statement outlines the cash moving in and out of a business during a specific period. Reviewing this statement involves looking at cash flows from operations, investments and financing activities to assess the business's ability to generate cash, manage debt and support growth. A positive cash flow can indicate financial stability, whereas a negative flow can be a sign of issues within the business.
While financial statements can be evaluated individually, they are often assessed together to provide a clear picture of a business's health. Key metrics include:
1. Liquidity, or the ability to meet short-term debt obligations
2. Solvency, or the capacity to meet long-term debt obligations
3. Profitability, or the revenue generated compared to expenses and remaining cash
4. Operating efficiency, or the effectiveness in managing daily operations
Compare these metrics with competitors over time, and take into account market conditions as you do so. Identify positive trends, and be wary of negative patterns that could signal concerns. Investors and decision-makers typically use these analyses to value businesses, and they can significantly impact their willingness to engage in deals.
Beyond financial statements, another critical aspect of a business's financial health is payroll. For every employee on payroll, both the employer and employee have payroll taxes, the taxes paid on wages, tips and salaries. Employees typically withhold these taxes from their paychecks to be sent to the government to fund specific programs, and employers match certain tax values and pay their own shares to the government. Businesses must deposit and report all payroll taxes to fully comply with the law.
Here are a few of the basics employers should be aware of:
Under the U.S. Federal Insurance Contributions Act (FICA), the revenue collected from payroll taxes is used to fund Social Security and Medicare programs, which return the financial and health benefits to the employees later in life.
For 2025, the Social Security tax rate is 6.2% each for employer and employee, totaling 12.4%, with a wage base limit of $176,100, according to the IRS. The Medicare tax is 1.45% each, totaling 2.9%, with no wage base limit. For employees who are paid more than $200,000 in wages in a year, an additional 0.9% Medicare tax is imposed on the employee but not the employer, the IRS also said.
Employees are subject to the federal income tax, which employers are responsible for withholding from the employee's wages on each paycheck. The amount the employer must withhold from the employee is calculated using the employee's Form W-4, Employee's Withholding Certificate.
Under the U.S. Federal Unemployment Tax Act (FUTA), employees who lose their jobs are subject to compensation. The FUTA tax is 6% of each terminated employee's FUTA wages, but this typically results in a net 0.6% tax rate if you qualify for applicable tax credit reductions, according to the IRS. Only the employer pays the FUTA tax, not the employee.
Employers often hire more staff to support business growth, which can complicate payroll management. Businesses should budget for payroll expenses—including wages, tips and taxes—and track withholding obligations to ensure accurate and timely payments.
Many companies use third-party payroll services to help with this. Employers should also ensure they're working with certified public accountants or financial advisors who are familiar with their industry to help manage finances and ensure their business is compliant with tax regulations.
Running a business involves complex financial management that requires a well-organized cash flow system for long-term sustainability. Owners must thoroughly assess their financial situation to ensure well-funded decisions, fair wages for employees and accurate tax reporting, all while maintaining cash flow for daily operations.
The information provided here is not investment, tax, or financial advice. You should consult with a licensed professional for advice concerning your specific situation.
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