Know Your Numbers Now for a Successful 2020
Your financial statements are the indicators of your business’s financial health. They enable you to track your progress, identify deficiencies, make adjustments if needed, and plan for growth. Yet sometimes business owners don’t know what to look for, or where, and rely on others to tell them where they stand. This is risky!
Start the New Year, knowing where you stand. Take time to know your numbers and learn to navigate the three primary financial reports that provide you with the information you need to assess your company’s readiness for 2020 and to stay on top of its financial health.
The Income Statement illustrates revenue versus expenses during a specified time period. With this information you can calculate critical numbers like gross profit, operating income, and net income. Net income is, of course, a major indicator of your business’s profitability and financial health. It is the amount your company is left with after paying expenses.
The Income Statement can help you analyze your bottom line. Compare your earnings to sales forecasts and your expenditures to budget. Be sure this document includes a column that calculates the percent of income for each line item as well as a Gross Profit line to give you a starting point for improving profitability.
And don’t make the mistake of relying on the Income Statement as your only measure of success (i.e. profit). To really understand your cash flow it is vital to focus on your other financial statements – the Balance Sheet and Statement of Cash Flow.
The Balance Sheet shows you where cash has been converted to other assets required to operate your business – such as inventory, work-in-process, accounts receivable, and fixed assets – providing you with a snapshot of your financial position at a specific moment in time. It should include a ratio analysis of the current month plus historic ratios. This is necessary to give you a starting point for improving cash flow management.
Assets equal liabilities and equity, so the Balance Sheet is a good test of whether your numbers actually add up and is a tool for calculating net worth. It also allows you to assess two key performance indicators.
- Debt – By dividing total debt by total assets, you’ll see what percentage of your assets is funded by debt. Then you can evaluate whether you need to make changes.
- Liquidity – Your assets may be in many forms – from cash on hand to real estate holdings. Review your assets – which should all be listed on your Balance Sheet – and determine how quickly those assets can be bought or sold. It may be necessary to consider a different mix of assets to ensure that you have sufficient liquid assets to cover your short-term cash requirements.
Statement of Cash Flow
The MOST critical financial piece (and one that many companies don’t produce) is the Statement of Cash Flow. It illustrates how your business moves money around – where cash is coming in and where it’s being spent. It will reveal whether you are generating cash flow from operations – which is critical to staying in business – if you are continuing to invest in your business model, or whether you are borrowing to generate positive cash flow to fund operations.
Positive cash flow equates to having funds to reinvest in your business and is an indicator of good financial health. If you have cash remaining after buying, maintaining, or improving fixed assets, you’re positioned well for growth.
The Statement of Cash Flow is a critical tool for managing finances and making informed business decisions. Tracking and assessing the right data will enable you to truly understand your cash flow, and will reveal where you need to start to improve cash flow management and profitability.
To grow your business you need the Financial Intelligence to capture the appropriate data, then understand and interpret your own Financial Statements. Once you’re able to navigate and interpret these primary financial documents, you’re equipped to assess where you stand, compared to your projections from last year, and whether and how to modify this year’s budget.
I’d welcome the opportunity to help you structure your company’s Financial Statements and learn to navigate, interpret and apply their data for optimal growth and success. Contact me for a complimentary review of your financial status.