Do you know where the money in your business is going every month? Do you have an accounting system? Are you analyzing your business performance metrics?
The health of your business can be measured by the financial statements that are prepared each month. To make better decisions for your business, you have to know your numbers. Not preparing financial statements means you are guessing. Complacency about your money will ensure you have greater risk within your business especially with your brand, your ability to grow, and the well-being of your employees.
Here are the key financial statements that you need to produce within your accounting and finance systems:
- Profit and Loss Statement (P&L). This statement is completed typically on a monthly basis. If you are using the cash basis method, then you just enter in the transactions into your accounting system as they occur. The P&L Statement shows your revenues (sales), the costs of the goods that you did sell along with expenses such as rent, postage, supplies, insurance, labor, and many more, but you don’t include money spent on new equipment, because this is an investment (an asset). After subtracting your cost of goods sold and expenses from your revenues, you get operating income. If it is positive, does this mean you have money? Keep reading.
- Balance Sheet. This statement is a snapshot in time at the value of your assets along with what you owe other people (liabilities). It is also done at the same time as your P&L statement, but it reflects values at the end of the period (month ending). Your assets are typically your cash accounts, equipment, and raw materials you have on hand plus any money that is owed to you from your customers (receivables). Liabilities are what you owe other people and are a claim against your assets. If you have borrowed money or you buy raw materials on credit, then these amounts will show up as liabilities on the balance sheet. A positive balance after you subtract the liabilities from your assets shows you have equity in the business.
- Cash Flow and Cash on Hand. These are the statements that show where the cash (physical and in bank accounts) is going. It is a great tool to use if you are having trouble paying expenses each week. You can see the shortfalls and apply for short term financing to cover expenses, if this fits within your strategy. The statement organizes your cash activities into three categories: operations, investing, and financing. When you pay expenses, the cash used is shown in the operations section. If you buy a new delivery truck, this is an investment, and if you obtain a short term loan, then you will see this amount in financing. Though not entirely a bad indicator, a negative cash flow should raise concerns about how long you will be in business. It will require additional analysis.
- Key Business Performance Reports. Your key business metrics are those that drive sales or other factors such as the price of your goods or services. You measure them to determine how to grow the business. A typical metric is customer traffic and by analyzing this, it will show the relationship of the metric to sales and to cash flow. Additionally, you can see how financial changes in your business will flow through your P&L statement.
Financial statements can assist in understanding the health of your business. If you are not producing financials every month, then you will be missing key insights into your business. Additionally, if you need to request financing, then no organization will loan funds without reviewing your financial statements and your key business metrics. If you are not doing this today, then start right away in this next period. It will change the way you make decisions and how you plan the future of your business.
“If you don’t have regular and accurate financial statements, you’re driving your business 100 miles an hour down a one-way street the wrong way, at night, in the fog, without lights.” -Jim Blasingame, author
How are you using financial statements to measure your business and make decisions? Please leave a comment or email at comment@stephenmclain.com.
Copyright-Stephen McLain 2016