The Importance of Reviewing Your Business’ Financial Statement
A financial statement gives a small business valuable information that can used to determine the overall “health” of the organization. It sheds light on cash flow, liquidity, profitability and more. However, without proper review and analysis, the financial statement can become littered with inaccuracies and be rendered useless – or even harmful. Holbrook & Manter is here to help you take a deeper, more investigative look into your small business’ financial statement.
Understanding the Most Important Details
A financial statement is made up of three complementing components. When combined, these pieces tell you (and your investors) how much your company is worth, how profitable the company can be and if your financial reporting is accurate.
The components of a Financial Statement include:
- The balance sheet: a snapshot of your assets & liabilities, giving an accurate net worth of the company or its equity
- Income statement: a summary of revenue & expenses generated over the reporting period
- Cash flow statement: how much money actually came in & out
For a small business, the balance sheet and income statement are critical for making educated business decisions, but the cash flow statement acts as your checks and balances system. If your profit and cash flow numbers (ending cash balance) match up with the balance sheet, you’re pretty much in the clear. If they do not, it’s time to dig deeper into the books and identify the causes of this numerical conflict.
Identifying Red Flags & Negative Trends
On top of gaining valuable insight into the positive performance of your business, a financial statement can also help you pinpoint negatives trends that may deter potential investors and stakeholders from investing in your business.
According to Quickbooks, these are the top 8 red flags your statement may reflect:
- Debt-to-equity ratio over 100%
- Multiple years of negative revenue trends
- Disproportionately high “other expenses” on balance sheet
- Unsteady cash flow
- Rising inventory in relation to sales
- Rising outstanding share count
- Routinely higher liabilities than assets
- Decreasing gross profit margin
Take a deeper look at these financial statement red flags here.
Helping Everyone Make Data-Driven Decisions
An accurate financial statement will give you all the information you need to understand how much capital you have at your disposal and where you should allocate those resources for optimal growth. But that’s not all. This collection of information can give lenders the evidence they need to extend or restrict your credit. Investors use this statement to decide if your business is worth investing in and, if so, at what price. The government may use this information to decide at what rate you should be taxed. And, should this situation arise, unions can use the financial statement as a base for its bargaining positions.
For more information about reviewing your financial statement, contact Holbrook & Manter’s Business Service & Solutions Team today. Specializing in small business accounting & bookkeeping services in Columbus, Ohio, BSST helps companies in Central Ohio manage their internal accounting & make smarter business decisions.