Every business owner should review their key financial reports every month. No matter how small your business, or even if you are an entrepreneur, knowledge of the financial health of your business is critical to success. Most business owners have an “idea” of how their business is doing. It’s been my experience when talking to business owners from varied industries that they have a reasonable idea of the revenues of their businesses, but that is not the whole picture. If you make business decisions with only the knowledge of how much you bring in every month, you will not last long.
There are three key financial reports that every business owner should review every month. Each report provides important information about your business, and put together, they offer a comprehensive picture of your business’s health.. If you are not a numbers person, someone on your team should be. Select someone trustworthy who can interpret the reports every month. The report review should show you trends both good and bad as well as point out red flags. The more you understand the health of your business, the better decisions you will make. This will ultimately lead to more net profit.
The Balance Sheet is a report that provides a snapshot of information about the business’s financial standing. The report consists of the company's assets, liabilities, and equity. The assets must equal the liabilities plus equity. Hence the name. Balance sheets are important for several reasons. In addition to helping the owner make qualified, positive business decisions on how to spend money and/or if to borrow, they also show if your business qualifies for a loan, and they help potential investors decide whether to invest in your business or not.
The Profit and Loss Statement is a report that provides details on the revenue a company earns and the expenses involved in operating the business. The report includes important information about revenues, cost of goods sold, and expenses of operating a business, such as administrative expenses, salaries, and overhead. It provides great insight into a company’s ability to generate income. Reviewing this report every month will show whether or not your business is profitable. This is a great report to determine where you're succeeding and where you need to improve. If the bottom line is positive then you’re making a profit, if not, you’re losing money. Analyzing expenses is key to understanding how much money it costs to operate your business. Running the report with a comparison of a prior year or month, and/or running the report compared to a budget, is a very valuable and powerful tool.
The Cash Flow Statement reports the amount of cash coming in and going out of the business over a specified period of time. It measures how well a company generates cash to pay its debt obligations and fund its operating expenses. It includes cash made by the business through operations, investments, and financing. In order for a business to be successful, it must have sufficient cash at all times. This report will show if a business has enough cash to pay expenses, loans, and taxes, as well as purchase assets for the company.
All three reports are critical to the success of all businesses. If reviewing financial reports makes your eyes glaze over, then hire a trustworthy bookkeeper/accountant that will review the reports with you every month or at the very least every quarter. The more you understand the big financial picture of your business, the better decisions you will make, and the more profitable your business will be.
