This is going to sound nerdy, but I took a continuing education course last week that really excited me. It was focused on financial statement analysis, and for those of you that work with us, you know we spend a LOT of time focusing on this. I believe it’s in your best interest as a business owner to understand your financial statements, top to bottom, so that you can make informed decisions about your business.
Your financial statements purport different things to different readers. What this means, quite simply, is that your banker and you could be reviewing those same financial statements from different perspectives and coming up with completely different conclusions about your business. How does that work?
What are bankers focused on? Liquidity, primarily, then profitability.
What you focused on? Profit and liquidity in equal portions.
Why am I telling you all this?
I think you are a stronger business owner when you can review your financial statements from the perspective of different readers.
• For instance, when you review your financial statements as the CEO of your business, spend time focusing on profitability. Review a 12-month rolling P&L, look at your sales trends, analyze the gross profit, watch the changes in the equity section of your balance sheet, review the metrics we provide, think through how all of the changes you’ve made in the last 12 months have impacted your profitability.
• Then flip the perspective and focus on liquidity for a moment. How much cash do you have today? How much cash are you projecting to receive this week from Accounts Receivable, and how much goes right back out to vendors, payroll, or an open credit card balance? Have you set aside enough cash for the upcoming income tax payments? Do you need to purchase any new equipment in the future? How will you do that? Will you use cash or will you finance it in some way (line of credit, credit card, small business loan)? How does this decision affect your long-term liquidity and short-term operational plans.
Our work with small business owners, whether in a monthly accounting engagement or in a consulting engagement, is focused on making them better business owners. If you don’t feel confident in your abilities to interpret what your financial statements are telling you, then make it a priority to become more confident. Ask your accountant for explanations and his/her perspective on your liquidity and profitability. If you don’t have an accountant, consider speaking to someone who can guide you and offer that important foundational knowledge that every business owner should understand.