Running a business full time is a lot of work. Not only are you running the company, you’re attempting to keep employees happy (if you have them), trying to get the word out about your business, and on top of that, trying to manage your finances. Who has time to truly understand the financials and what they mean?
We think understanding your financial statements is key to effectively running your business and making smart decisions. Your financial statements can shed light on areas of your business and can help you identify areas for growth and for improvement.
Your financial statements tell the story of your business, where it has been, where it currently sits and where it’s headed. Don’t believe us? Here are a few examples of things your financial statements can tell you.
The balance sheet tells you about the resources (or sometimes lack of resources) in your business. This financial statement is measured at a point in time (as compared to a period of time). Here are some of the measurements the balance sheet is responsible for telling you:
- How much cash do you have?
- What is the net book value (NBV) of any property and equipment you are holding for business use? NBV…that is the original cost less depreciation.
- How much do people owe you? How much do you owe others?
- How much is left in your business after all your liabilities are taken care of (a.k.a equity)?
- How much of your business is financed by long-term debt versus financed by you (or any partners you might have)?
- Speaking of long-term debt, what principal portion of that debt is due within the next year?
- What is your ability to pay your current liabilities with current assets (aka working capital)? No so fast, what’s makes them current? Typically current liabilities and assets are those that are expected to be paid or consumed (or received in the case of accounts receivable) within the next year.
The income statement tells you about the profitability (or again sometimes lack of profitability) of your business. This financial statement is measured for a period of time, such as a month, quarter or year. Here are some of the measurements the income statement is responsible for telling you:
- What was the gross margin for the period (gross income – cost of goods)?
- What were your operating expenses for the period?
- What was the net income for the period (gross margin – operating expenses – other income/expense)?
In addition if you are tracking your income and expenses by profit centers (ex. job, department, product line, etc.), you would be able to see all of the above measurements by those profit centers. This is especially valuable as it helps determine where you are making money or losing money.
The statement of cash flows tells you about the sources and uses of your cash. In other words where did it all come from and where did it all go?
Now the really good stuff…
You can take your financial statements to the next level by comparing your current performance against historical performance, benchmarking yourself against your industry and peers, and projecting your future performance.
- You against you…viewing your financial statements historically allows you to see changes in balances and trends in your performance (good or bad).
- You against the industry….viewing your financial statements against industry data or standards allows you to see how you stack up. Where are you better than the industry or where can you improve compared to the industry?
- Projecting your future…projecting where you see yourself financially can be a valuable tool in budgeting your expenditures and managing your business. The most valuable projections are done on a rolling basis, meaning the projections are changing as your business changes. Projections that are only looked at on an annual basis do not provide as much value.
To wrap it all up, financial statements provide a wealth of information for you to make more informed decisions about your business. Knowing and understanding where you stand financially can mean the success or failure of your business.