Understanding Your Financial Reports

For many small businesses, financial analysis is limited to the Profit & Loss Statement (also know as the Income Statement) which compares the revenue and expenses over a specific period of time. If the P&L shows a profit, then the business owner celebrates and all is good in the world. But o positive bottom line on your P&L doesn’t necessarily mean positive cash flow and it certainly isn’t enough to fully understand your company’s performance.

In his book, In The Black, author Allen Bostrom notes that accounting is the most-ignored component of business management yet, it is also one of the most dangerous. Not knowing your costs or understanding where your revenue comes from can quickly lead to financial disaster.

So, what kind of analysis should you be doing? In addition to the P&L, here’s a few key reports you should be reviewing on a regular basis:

Balance Sheet – Like the P&L, the Balance Sheet helps you determine if your business is profitable but rather than simply focusing on revenue and expenses, the balance sheet is a snapshot of your business for a specific point in time and tells you how your current assets compare with your current liabilities. If you liquidated today, could you cover all your obligations? Would you have anything left over? The Balance Sheet can answer these questions.

Cash Flow Statement – This report tells you if your current business activities are generating cash and more importantly, which activities are your money-makers. It also shows you how much debt has been paid or borrowed, how much cash you have for investing or financing and how inventory purchases are affecting your bottom line.

Financial Ratios – Ratios help you measure your liquidity… that is your ability to convert assets into cash if you need it. Ratios can also help you measure how profitable your business is, how vulnerable it might be to debt and even how well your company has performed in comparison to your competitors.

Your accountant can help you set up these ratios and reports so that you can review them on a regular basis. If you’re not getting the reports you need, call us today. We can help you get a complete financial picture of your business.