Get to Know Your Financial Statements

Financial statements are a compilation of your daily financial activity. Understanding your financial statements is just as essential to your business success as a consistent marketing effort, strong sales and a high level of customer satisfaction. As you know, banks, creditors, investors, and your tax advisors make important decisions about your company using your financial statements. As a business owner you owe it to yourself to carefully review your financial information. Do not depend on others to interpret your financial status. If your statements look like a foreign language to you, ask your accountant to explain each statement to you and what each line item means. Or, better yet, take a basic accounting course so you can conduct your own financial review.


Regardless of your present level of understanding, here are some useful strategies you can adopt to make better use of your financial statements.

Four financial reports you should know well:

• Business Budget
• Profit & Loss Statement
• Comparative Income
• Balance Sheet

First, use your financial statements to develop a budget for the upcoming year based on actual data from prior periods. The best source for developing this budget is your income statement. When developing your budget, you should also consider industry trends and your own expectations for the coming year.

Second, during the new tax year, review your income statement at the end of each month. We strongly recommend that you also set up a comparative income statement based on the prior year's figures. Analyze the relationships between revenues and expenses. Also assess any discrepancies as compared to your expectations.

Third, analyze and understand your balance sheet. Your balance sheet should contain proper classifications of current and non-current assets as well as current and non-current liabilities. Current assets mean cash and items that can be converted to cash within one year (e.g. Accounts Receivable and Loans Receivable). Current liabilities mean money due or payable within one year (e.g. Accounts Payable and Loans Payable). Your Balance Sheet should also show your Fixed Assets (e.g. Equipment, Autos & Trucks, and Furniture & Fixtures) and separate accounts for related Accumulated Depreciation.

Fourth, carefully look at each line item during your monthly review of each financial statement. "Red flags" may emerge as you review account balances.

Fifth, take swift corrective action to reverse any unwanted trends brought to your attention from your financial statements.

Remember; better understanding of your financial statements and using the information they provide will promote greater financial success for your business.