Business Advisor: March 2011

What’s in your financial statements anyway? More than you think. This article helps you understand two things: What the key financial statements of your business mean and, more importantly, the value of your financial statements to your business.

What’s in your financial statements anyway? More than you think. This article helps you understand two things: What the key financial statements of your business mean and, more importantly, the value of your financial statements to your business. 

Today’s business owners are, well . . . busy. But successful owners recognize the importance of understanding the basics behind their financial statements as an essential tool to monitor the performance of their business. It isn’t just about the bottom line at the end of your fiscal year. Monthly monitoring is critical so that you can take advantage of opportunities and/or correct any issues as the year progresses. Business owners should review a monthly reporting package. Here are some tips on what it should include and what the information means for your business.

Income statement
This statement summarizes the amount of revenue less cost of goods sold less operating expenses to arrive at your net profit for a stated period. The income statement in your monthly package should include a comparison to budgeted figures as well as a comparison to the prior year for the same period. It is most helpful when each expense line is measured as a percentage of sales so that you can easily monitor trends and make corrective decisions. Key items on the income statement are cost of sales, gross margin, total expenses and net profit. 

Balance sheet
This summary statement shows the business’s financial position by indicating assets, liabilities and owner’s equity at a particular moment in time. Key items to monitor on the balance sheet are cash, accounts receivable, inventory and accounts payable. The information in your package should also include detailed listings by age for accounts receivable, inventory and accounts payable so that you can monitor any credit risks, slow-moving inventory and help to anticipate upcoming cash outlays. Another way to use this statement is to ensure your cash account is reconciled to your bank statement on a monthly basis.

Statement of cash flows
This statement shows the overall sources and outlays of cash from operating, financing and investing activities for a period. This is not only a key monitoring tool that indicates how much cash is available; it also allows you to see how you’re spending your money at a bird’s eye view.

Financial reporting can seem overwhelming. If you take the time to understand some basic concepts and to review results monthly, you will be able to focus on the numbers most critical to the health of your business that deserve your attention.

Wayne Gelb is a partner in the audit and assurance practice and Christine Mattear is a senior manager in the audit and assurance practice in the Toronto office of Fuller Landau LLP. Fuller Landau provides tax, accounting and business advisory services to owners of growth oriented, mid-sized businesses. www.fullerlandau.com