Improving financial performance is a top priority for any business owner. Financial statements prepared by a CPA can help by identifying financial and operational deficiencies and discovering areas for cutting costs and generating revenue. To reap these benefits, you must learn how to glean the information that will be most valuable.
Which statements should you examine?
These statements include the balance sheet, income statement (which is also referred to as a profit and loss or P&L statement) and statement of cash flows. The balance sheet liststhe business assets, liabilities and owner’s equity at any given point in time. Assets typically include cash, equipment, furniture, computers and other machinery, signage, and inventory. Liabilities typically include accounts payable, accrued liabilities, notes payable and long-term debt.
The income statement reports a sales, cost of sales and expenses over a given period. The difference between these amounts is your profit (or, if negative, its loss).
The statement of cash flows reports cash inflows and outflows. It shows changes over a period, instead of an absolute dollar amount at a specific point in time. It’s important information because businesses need to have enough liquid cash on hand to meet operating expenses and purchase fixed assets.
Cash flow statements are usually divided into three parts that review cash flow from operating, investing and financing activities. The net increase or decrease in cash for the period being measured is reflected at the bottom of the statement.
What should you look for?
You can get the most out of your financial statements by knowing how to analyze them. Consider the balance sheet: Improve cash flow by scrutinizing the balance sheet for trapped working capital. You also can use information from the P&L to improve performance.
You can also calculate financial ratios from information contained in the income statement. Examples include:
- Net profit to sales,
- Total expenses to sales,
- Net profit to gross profit
These ratios should be compared to industry benchmarks, your CPA can help you with the exercise. They also can be compared to the previous month or the same month last year.
For more information on how to understand your financial statements and how to let them be a guide for your business, please reach out to Holbrook & Manter today. Our Business Services & Solutions Team would be happy to help you.