Tag Archives: balance sheet

financial statements

What Your Financial Statements Can Tell You About Your Company

You don’t have to be a CPA or rocket scientist to decipher the information on financial statements. If you have been intimidated or reluctant to take the time to learn to read your company’s financial statements, now is a great time to learn.

Below are a few quick and easy steps to untangle the web of financial reports like income statements, balance sheets and cash flow statements.

Income statement

Income statements can be used to make key decisions, such as whether to extend credit to new accounts; increase or decrease an existing line of credit; offer certain terms or discounts; and, most importantly, whether a company will get paid.

The income statement records a company’s performance over a set period of time and starts with net operating income, sales or revenue, and ends with the net income. The net income is what the company earns after deducting expenses like the cost of goods sold, overhead and interest.

Key metrics to look at on the income statement include the interest coverage ratio and gross profit margin. The interest coverage ratio or times-interest-earned ratio lets you know if the company has enough money to cover the cost of its debt. The gross profit margin shows the company’s relationship between revenue and the cost of goods sold. You can use the percentages to gauge whether a company is incurring insufficient volume or excessive purchasing or labor costs.

You want both the interest coverage ratio and the gross profit margin to be high so that your company is not carrying too much debt and there is enough money to pay expenses.

Balance sheet

A balance sheet captures a company’s financial position at a specific point in time. This shows the company’s total assets such as cash, short-term investments, inventories and equipment; total liabilities like accounts and notes payable; and shareholders’ or owners’ equity. The quick ratio and the debt-to-equity ratio are important to note in the balance sheet.

Quick ratios are considered to be a more conservative measurement than the current assets ratio because inventories are excluded. Inventories are “less liquid” than cash, and if a company needed to sell its inventories to pay debt, it could be difficult to arrange a quick sale.

A high debt-to-equity ratio could indicate a company has aggressively financed its growth with debt. On the up side, if the borrowed money assisted with increased or improved operations, the company might generate more earnings.

Each industry is different, and it is essential to compare to its peers. Some industries have low gross margins which could be considered bad, but if it is an industry norm and the fixed costs are low, it should be less of a concern.

Cash flow statement

Cash flow statements tell where a company is getting cash and how they are using it. Cash flow statements are divided into three sections: operating, investing and financing activities. Some key information contained in cash flow statements comes from income statements and balance sheets.

Operating activities — cash and non-cash

The first line item is consolidated net income. You can add certain line items like depreciation and non-cash transactions to net income and subtract other items, such as deferred income taxes, to calculate how much cash a company has generated during a specific time period.

Investing activities — inflows or deposits

A cash flow statement’s investing activities section details a company’s property, plant and equipment purchases, sales of short-term investments, or the acquisition of a business during a specific time period.

Financing activities — outflows or payments

Understanding significant changes in a company’s cash flow can help you make informed decisions. You want to know whether your company’s cash is increasing or decreasing. Gains may signal an organization financed its debt and investments and had more money remaining than in the prior period. Similarly, if a company’s cash flow is decreasing, the organization may experience future cash flow management problems.

While you may still need to hire a professional to help you maintain your financial statements and documents, it is always good to have a general understanding of what each financial statement is used for. As a business owner, it is important to know the financial trends to determine if the numbers are increasing, declining or staying flat. Then you can be proactive and steer you company in the correct financial direction.

For more information about financial statements and/or FSW Funding, fswfunding.com.

Financial Statements

How’s Your Business Doing? Check Your Financial Statements

Curious to know how your business is doing, financially? Look at your financial statements; here’s how.

You’re the owner of your business. You know how to sell; you know how to make your product; a you know how to find opportunities that will make your business grow.

But do you know how to determine if you’re doing well from a financial standpoint?

It’s Time to Be Honest With Yourself

Be honest. Do you really know how to look at your financial statements and determine if you are doing well? Do you really know what is most important when you look at those statements?

“What statements?” you may ask. The P&L (profit & loss statement), the balance sheet and the cash flow statement – those are the statements you need to look at each month. And they need to be prepared and given to you as soon as possible after the close of each month.

Now, I’m being a little facetious here, but it is not that unusual for me to speak with owners of businesses and get some interesting answers to questions like:

  • Are your financial statements prepared on a timely basis?
  • Are they free from error?
  • Does your controller tell you, when reviewing the October P&L, “Well, I had to make some adjustments to the September results, so September was a little better than we thought, but October isn’t so good”?

If you have heard this before, join the crowd. You are not alone. It’s not terribly unusual if you either don’t get routine, timely financial statements or if you don’t trust them. But you need to receive regular, reliable financial information each month that you can use to help you make decisions.

Think How Your Banker Thinks

And, while we’re on the topic, ask yourself another question:  “If I don’t trust my own financial statements, what must my banker think about them?”

You may remember when bankers didn’t always insist on seeing your financial statements or waited until you gave them the annual statements. Well, those days are over. All good bankers expect quarterly statements, at a minimum, and many also want to see how you are doing on a monthly basis, as well.

They want to see the statements so that they can determine if there are any causes for concern. You can understand that. But you need to know what areas would give rise to such concerns long before your banker identifies them. The only way you can do that is to have reliable financial statements and to analyze them as your banker (or a CFO) would:  What are the trends that offer opportunity, or are they cause for concern? How am I doing with respect to the covenants in the loan agreement? You need to be able to understand what is important to your banker and be able to explain how you are doing in concrete financial terms, using the statements as the basis for your conversation.

And You Need Even More Information

In addition to the basic financial statements, you also need to have a few reports that provide you with the important information you need. You know what’s critical to your business. It may be a little different for each company, but I’ll bet you want to know a few things every month:

  • Who’s my biggest customer, and how profitable is that customer?
  • Which customers are 10 percent ahead (or behind) last year?
  • What sales are in my pipeline?
  • What’s my cash position?
  • Where will my cash be at the end of the month, and will I have enough cash when my taxes are due?
  • What’s my gross margin this month, compared with where I thought it should be?
  • How am I doing compared with budget? (You DO have a budget, right?)

You may have started your company knowing what you needed to know. But if you’ve grown — or if you’re struggling to make a profit or improve it — chances are that the information you’re getting is not really helping you now.

If you need help with getting this information, stop kidding yourself. As the owner, you are probably not the best-equipped person to create this information — and you certainly have better things to do as the owner than to create financial statements. You need to find someone who can help you determine what information you need and who knows how to get it; you need someone who has developed such information in the past. This is not a place to skimp.

So the question — “How’s my business doing?”— is simple to answer. But the answer can be quite difficult, because you need to understand what you don’t know — and to find a way to get that information.

For more information about the topics discussed, including financial statements, visit B2BCFO.com.