We’ve all heard that “cash is king” and it is when it comes to running your business. You need to make sure you have enough to pay your payroll and your suppliers. As I mentioned in a previous post, you need to manage your cash to remain a successful business.
But, just as important as cash in your business to operate, your periodic financial statements need to be reviewed and analyzed.
There are three statements business owners should focus on: the Balance Sheet, the Income Statement and the Statement of Cash Flows. Most small business owners will focus on the Income Statement but the Balance Sheet and Cash Flow hold a wealth of information also.
The Balance Sheet shows your financial position at a certain date. You can see “what you own” and “what you owe”. Investors and banks will focus on your balance sheet and calculate ratios such as your current ratio and quick ratio just as much as they focus on your Income Statement and so should you.
The Income Statement shows your revenue and expenses for a particular time frame – for example year to date, quarterly and a comparison to prior years.
Lastly, the Statement of Cash Flows will compare your cash at the beginning of the period and separate it into cash used for operations, investing and financing.
Financial Statement analysis is not as difficult as you think. Depending on your business there are a few ratios that will be the most valuable to you and those are the ones you should focus on first.
Many small businesses will not ask for financials from their accountant because they feel it is an unnecessary expense. But, with the real time nature of small business accounting products such as Sage 50, Xero and QuickBooks there is no reason not to have them. And we love to explain them!