Small Business Consultants Help with Understanding Financials
February 11, 2015
Understanding financial statements can be intimidating and scary for those not schooled in accounting. It is a must, however, to understand financial statements when planning for the future.
Three main financial statements that a business can use to review and analyze the operations are:
- Income statement - Lists revenue and expense items (can be general or detailed)
- Balance sheet - Lists all assets, liabilities, and capital (can be general or detailed)
- Statement of cash flows - Lists sources and uses of cash (might even be referred to as the "where got, where gone" statement)
Past Performance - Future Predictors
Financial statements are historical in nature. They record what happened to a business in the past. Although past performance is not necessarily repeated in the future, past performance can be an indicator of future performance. This might be good or bad for a business depending on whether past performance was positive, negative, or somewhere in the middle.
One real value of financial statements is being able to analyze what happened in the past to help make decisions of what to do or not do in the future.
- Positive performance in the past can be repeated in the future with changes to enhance the positive performance to achieve greater results.
- Negative performance in the past can be changed to either minimize the negative performance or create positive performance in the future.
Reactive vs. Proactive
Reactive decisions are based on something that already happened in a business. Proactive decisions are based on making something happen in the future. Although all businesses will have reactive decisions, proactive decisions can cause something to happen, obviously, with an intended positive outcome.
Financial statements should be analyzed and reviewed looking for trends and spotting anomalies, and then proactively making decisions that will lead to higher business performance and increased net profits.
Posted by Richard Weinberger, PhD, CPA
Chief Executive Officer
Association of Accredited Small Business Consultants