Financial Statements – Love ‘em or Hate ‘em
September 24, 2015
Financial statements...every business produces them...or should. Some are prepared monthly, others quarterly. Some might even be prepared only annually. Of course, the more frequently, the better. Financial statements can have either a love or hate relationship with small business owners. Those who understand the true treasure of the information embedded in financial statements love them. On the other hand, business owners who fear the numbers and find financial statements full of mysteries hate them.
So, the group of owners who understand the "numbers" know that financial statements when prepared correctly and timely can be a tremendous asset to a business. Conversely, those who fear financial statements can actually be hindering their businesses by not using the financial knowledge to drive their businesses forward. Which group do you fall into?
Financial knowledge is a powerful tool that enables business owners to use what happened in the past to improve upon the future. Rather than only reacting to something that already occurred, correctly analyzing financial statements allows an owner to make proactive, forward-thinking decisions.
It's a Storybook
Certainly, financial statements are a conglomeration of numbers neatly printed in an orderly format. Financial statements, however, are much more than mere numbers. They tell a complete story about a business. When the right questions are asked, information is revealed about a business that goes far beyond revenues and expenses...and assets and liabilities. The numbers tell how a business is operated, what produces a profit, if goals are being met, or what might be changed in the future to improve performance.
How does a particular expense affect revenue? Did a particular marketing campaign affect incoming traffic or phone calls? This was an action, what was the effect? Amazing the information contained in financial statements only for the asking!
Now or Later?
For a small business owner always pressed for time, a decision has to be made when should financial statements be prepared...monthly, quarterly, or annually? "If I'm not going to read them, why should I prepare them?" Good question. Of course, financial statements should be prepared monthly and read! It's like a book sitting on a shelf with the cover never being opened. No one knows what's on the inside. It's the same with financial statements. Even when prepared monthly if not reviewed, the small business owner never knows the treasures on the inside.
The Treasure Chest
Financial statements yield much more than a net profit (or loss) figure. When summarized on a spreadsheet by month or year, the reader can view an entire history of the business. The following "financial gems" can be found when reviewing financial statements and asking the right questions:
- Positive or negative trends for revenue and expenses, assets and liabilities
- Anomalies showing up in particular financial statement accounts
- Conversion of dollars (or other currencies) to percentages allowing for supplemental trend review and out of the ordinary financial occurrences
- Sources and uses of cash critical in forecasting future cash flows and needs
- Gross profit analysis by product line, service line, department, or branch
Asking questions, seeking answers, and taking corrective action where and when warranted allows a small business to direct energy and concentrate efforts in areas that will yield the most immediate and positive results. Typical questions to ask from a review of the financial statements might be:
- How is pricing determined?
- What are sales terms?
- What are sales increases and decreases attributed to?
- How is an advantage over the competition achieved?
- Have marketing efforts been defined for different markets?
- Does my business have the capacity to grow?
- Are marketing dollars producing the desired results?
- Can some expenses be reduced while at the same time increasing efficiency?
Demystify Financial Statements
Let financial statements become a friend to your business rather than a foe. Don't become overwhelmed with numbers. Take one account at a time, review it, analyze it, and take appropriate action.