Today’s tip is all about understanding the financial information for your business, which is reflected on Financial Statements. Ok, so I am sure that you have heard the term Financial Statement before, but probably have always been confused as to its exact meaning in relation to Your business. You are probably wondering, “Which statements are the most important, what is the meaning of the numbers on the statements, and which statement do you share with your CPA for tax filing? Now I know numbers may not be your thing, and you might already be bored, but please stay with me. Here’s the thing, your numbers tell a story, and their voice is revealed through your financial statements. Without your statements, you’re flying blind, up the creek without a paddle, on a tightrope without a net; I think you get the point.
Understanding your financial statements and taking action are the key to having a profitable business to take care of yourself and your family. At a minimum, all small business owners must regularly review and understand the following three financial statements: Profit & Loss, Balance Sheet, and the Statement of Cash Flows.
1.Profit & Loss (P&L):
This is the MOST important (and easiest to understand) statement for your business. It shows your income (sales to customers) minus expenses (payments to vendors), with the remaining Profit for a tax year (usually Jan-Dec). In other words, your sales less expenses = Your Profit, or Money in the Bank (before taxes), as I refer to it. Of course, the objective is to have a lot of Profit. While that might sound obvious, you would be surprised how many business owners do not understand this report. If your Profit is not where you want it to be, then you must look into the reasons why. This is the fun part, figuring this out. It could be many reasons, and is usually a combination, from sales too low, expenses to high, pricing model, ineffectual marketing, employee skill set, mismanagement.
In this situation, I recommend talking to a small business consultant to help you develop a plan to achieve your desired Profit Margin, too difficult to do this on your own – besides the problem could be you, and that is difficult to see sometimes (Ask me how I know this).
Shows the overall health or sickness of your company, from inception. This includes Assets, which are bank account balances, accounts receivable, inventory on hand, vehicles, property, large equipment; Liabilities, which is money you owe vendors (credit card balances, business loans, accounts payable); and lastly, the overall Equity in your business since inception. Equity can be confusing, so think of it as the sum total of annual Profit (from the P&L) you have made since you started your business. Now if this is a negative number, immediate action must be taken! You are spending more than you are selling – another reason to get assistance from a business consultant to diagnose the cause and develop a plan of action with you.
3.Statement of Cash Flows:
This statement is actually a combination of the P&L and Balance Sheet, from a cash position viewpoint. This report will let you know how much cash is available in the bank right now (Bank balance), predict how much cash will be coming in and when (accounts receivable), and predict how much you owe (accounts payable). If you are closing a good amount of sales, but never seem to have enough money in the bank to pay your bills or take a salary, this report will show you why.
Now for the reports you need to send to your CPA. Starting with the P&L, the CPA will need both a summary and detail version. You will also want to send the Balance Sheet in both summary and detail. We recommend running these reports on a monthly, quarterly, and annual basis, with comparisons to prior years, to see your business growth over the years. As business owners, we often don’t realize how far we have come, so the P&L over the past 5 years can provide much-needed perspective, plus an opportunity for celebration!!
Now that you are aware of the importance of your business financial statements, you may be asking, “How can I learn to read and interpret the Numbers Story on my financial statements, and take the appropriate action?” This is where it gets a little sticky, so please ask for expert assistance from your bookkeeper, CPA, or contact us – “Our mission is to show you how to increase your bottom line Profit, and have fun doing it”
The Numbers Divas