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Business Owner’s Guide to Monitoring & Understanding Financial Statements

Financial statements are a window into your company’s overall financial health. Aside from the obvious benefits of having your financial statements organized for tax season each year, financial statements are used to provide shareholders, partners, or potential investors with future insight and key metrics of your company’s performance. They are also powerful diagnostic tools to evaluate the company’s financial strengths, weaknesses, potential problems, and even opportunities.

No matter how big or small your business is, whether you do your own bookkeeping or are seeking a small business accountant for guidance, here are six financial reports that all business owners should review and understand to help spot and avoid any financial shortfalls coming down the path:

P&L Statement. Also referred to as the Income Statement, this reveals your company’s revenue, expenses, and net income or losses for a particular reporting period. Other figures represented include your total sales, cost of revenue, taxes paid, interest expense, and operating profit. The P&L statement also gives insight into if the company is profitable and how much it costs to produce your product or service.

Balance Sheet. The Balance Sheet is a financial statement summarizing your company’s total assets, liabilities, investments, and retained earnings at a specific point in time. Most CPAs and business accountants recommend reviewing the balance sheet at the end of each accounting period. It provides a snapshot of your company’s financial position, including your financial landscape such as how much your company owns, how much you owe in debt, and other financial inflows and outflows. If you were to secure a loan, your lender will want a copy of the balance sheet to assess your creditworthiness.

Statement of Cash Flow. Cash is king in business so therefore your cash flow statement should be monitored closely for any signs of trouble. You can even have cash flowing into the company but still not make much of a profit. This report shows how your company’s liquid assets are rising or falling over time. Positive cash flow is an indicator that more money is flowing in than out of the company’s accounts. Conversely, negative cash flow could be an indicator of financial difficulty. Your cash flow statement is important as well when you are planning for a slower sales season, so you know how to spend, invest, and que-up inventory.

Accounts Payable. Reports referencing accounts payable give you a closer look at your company’s payments on short-term or recurring debts. You can use these reports to verify bill payments and track the history of payments made within specific departments.

Accounts Receivable. An accounts receivable aging report allows you to see where you stand with respect to the aging of your outstanding invoices. Do you have a significant number of accounts that are delinquent? If so, this is a good time to reach out to late-paying customers to discuss new terms, discounts, or other incentives to get those invoices paid—and on time.

Budget vs Actual. Budgets allow a business owner to not only plan for expenses but to analyze expenditures and make changes according to the needs of the business. This report is a comparison of actual results, primarily from the Income Statement, against the budgeted amounts that were projected at the beginning of the period. Reviewing this statement will allow you or your small business accountant to assess how closely you’re spending, and if revenue generation meets the financial forecasting projections included in the budget. It can help identify areas that were over and under budget—which is essential if you are planning on expanding, hiring, or purchasing new equipment.

Reading and understanding these financial documents gives you an overview of these important metrics:

  • The company’s debts and ability to repay them
  • Profits and/or losses in a given time period
  • Whether profit has increased or decreased compared to similar past accounting periods
  • Operational expenses, especially compared to the revenue generated from those expenses

Sounds complicated?

Taking the time to review and monitor these reports frequently may seem daunting. If you don’t have a financial background or a dedicated business accountant, the good news is our highly experienced CPAs and small business accountants can assist. We will consistently provide you with timely and accurate financials and reports (like the ones mentioned above) as well as the actionable financial analysis you need to make important business decisions.

Contact us today for a discussion.