Often, I meet with business owners that are embarrassed that they don’t understand the basics of Finance. Don’t be embarrassed. Nobody starts a business because they know what financial statements mean. But if you don’t understand what your financial statements are telling you, how can you use that information to help grow your business?
So, here’s a little refresher course on the three primary Financial Statements, Balance Sheet, Income Statement and Statement of Cash Flows. They each tell you different things about your business.
The Balance Sheet tells you the status of your business at a point in time. The date of the report will tell you the day that the calculations were done.
The Income Statement tells you how your business did over a period of time. When you get the report, it will have a date range on it. This report tells you how your business did during those weeks, months or years.
The Statement of Cash Flows tells you how you used money and where it came from, during a particular period.
It’s generally important to look at those reports at the same time, generated from the same period of time. That way, you have consistent information. Here are some quick ideas about what to look at when you see these statements monthly:
- Balance Sheet – This is the presentation of Assets and Liabilities of your company. These numbers tell you about the financial strength of your company. Not just what money you have, but what you own (like inventory and equipment), what you owe (to the bank, to your suppliers, to investors) and what others owe you (customers, employee loans, deposits to suppliers.) Review these numbers and note how they’ve changed from last month. Various ratios allow a quick way of measuring your company. Tracking that month to month tells you whether you are making progress, and how quickly.
- Income Statement –This report is a statement of your sales, expenses and income. It is the review of this statement and the detail behind it that tells you whether you made money and where you made it. Subsidiary schedules give you the detail that makes up these numbers. It is an analysis of these numbers that allows you to make changes in your business today that will affect your profitability tomorrow. You need to understand what makes up each of those numbers. If you group everything into a few categories, you lose the impact of knowing where you spent the money. If you have too many categories, then you can end up with an income statement that is 20 or 30 pages long. Too much detail obscures the overall performance of the company, just like not having enough information.
- Statement of Cash Flows – Where your company got cash, and where it spent it over the period. Did you collect or use more money this past month? Where did the money you spent come from? Did you borrow the money, sell more inventory or collect more cash? Since cash is what drives any business forward, how you used your money this past month is important in your planning. It’s really important to understand how you are using your money. This report tells you that.
These three statements tell you the basics, the summary of what your business has done over that past period – whether a month, quarter or the year. But it is the detail behind those numbers that will tell you what you need to do to grow your business. It is the subsidiary schedules of Inventory, Sales by Product, Margins by Product Group, Prepaids and Accruals, Operating Expenses and how they break down into Operating costs and Cost of Goods sold. If you are just looking at the basic Income Statement or Balance Sheet in a vacuum, you’re missing out on the meat that makes the reports important tools. Plus, if you’re looking at the reports online, rather than a printed report, many software packages let you click on numbers and zoom into the individual transaction detail. This can save a lot of time in writing out questions and having your staff look up the details.
Every client we’ve worked with has specially designed subsidiary reports that help the owner focus on the aspects of his business that are most important to him, his customers and his profitability. If you’re just looking at those three basic statements, you’re missing the detail that allows you to drive your business forward. It’s an old cliché, but very true. The devil is in the details. Without the details, you won’t know what to fix, or whether difficulties in your business might be masked by the success of a particular product line or customer sale.
A proven CFO can help you analyze these statements and help you do the planning that you need.