WANTED: Financial Statement Interpreter By Aundrea Wilcox
This weekend, I was scavenging the Internet looking for
ideas that small business owners can use to improve their bottom line when I
came across an article on palm reading.
You might be asking … “What does this have to do with business?” Well, I found myself attempting to read my own
palm just for fun, but I quickly doubted and dismissed what it told me. In other words, my reading was skewed to what
I wanted to hear. For example, my life
line seemed too short, so I immediately disregarded that because who wants to
die at such a young age? I didn’t see a
success line at all which is not unusual—so it said, but still I disregarded
that because I strive for success every day, and I’ll be darned if I don’t get
someplace good eventually—I’ve worked too hard to settle for anything less,
right?!
In the real world, it’s crucial for small business owners to
be able to “read” their financial statements before making any major financial
decisions such as borrowing money, signing a long-term lease or agreement,
buying a building, etc. Financial
analysis is a deep evaluation of financial events and interpretation by an experienced and knowledgeable professional, like a banker, attorney, CPA or
business consultant.
You need copies of the past two or three years of your
Balance Sheet and Income Statement as a minimum to perform a comprehensive
analysis that measures your liquidity, profitability, sales, borrowing, and
asset utilization.
Liquidity is a
measure of your ability to meet financial obligations. If sales and profits have increased
significantly but liquidity has stayed flat, you need to make some
changes. An analysis of your financial
statements will show whether or not you have invested enough resources in cash
accounts, and if you have a sufficient amount of total current assets as
compared to short-term liabilities. To
increase cash flow, you might consider renting rather than buying in some
instances. Also make sure you are
sending out invoices in a timely manner and without needless clerical errors
that can slow down the payment process.
Are you using cash for activities that are unrelated to the business,
e.g., personal loans? Are you able to
accept credit cards? Why wait 30 days
when you can get paid immediately?
PROFIT MARGIN shows whether the trends in profit are
positive or negative for the company. If
net profit margin and gross profit margin have both fallen from the last
period, this might indicate that the company is not controlling the expense
side of the business as it should be.
Consequently, you will want to nip this before things get even more out
of hand. Compare your profit margin to
other businesses in your industry and try to do better than the standard.
SALES should help improve profitability if they are growing
and expenses are managed efficiently. Be
sure to develop relationships with your clients, other service providers and
vendors to help gain referrals for new business.
BORROWING activities can help profitability also, but be
careful of the cost and risk associated with it. Are you already having a hard time fulfilling
any current debts? If you can grow your
business without adding debt, it might be the most prudent competitive move you
can make.
ASSETS measure how effectively you are utilizing your gross
fixed assets. This is especially
insightful for businesses that use heavy machinery or equipment to manufacture
a product.
At the end of the day, you can’t leave your financial
statement analysis to just anyone to perform
—as you can see you could be in
danger of drawing the wrong conclusions, leading to a series of additional bad
choices. A bunch of numbers at the end
of a financial period doesn’t mean anything—you have to pick up on the story
behind the numbers. Conducting an
analysis on a regular basis can assist you in business development, and help
you prepare for the future. Make sure
you are working with a financial planner, banker, CPA or consultant you can
trust who will be your interpreter or storyteller over the long run. Yes, consistency does matter. And make sure that you are at least familiar
with the basics of financial statement analysis yourself. You can get free access to online training
for small businesses at sba.gov, or visit your local small business development
center for in-person one-on-one assistance or to inquire about group training
opportunities.
For more information from Aundrea Wilcox follow her @StartUpSavvy
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