Too many small business owners don’t review their financial statements monthly. They think they have all the necessary information in their head. But without accurate financial reports, you will never maximize the growth of your company.
It’s essential that every small business owner learns how to read their financial statements. Like so many things in small business, you can’t use your fear or lack of knowledge of numbers as an excuse. Here’s where to start:
A profit and loss statement reports the sales the company made and what it cost to generate that revenue. It lists the revenue, expenses, and profit of a business over a period of time.
The basic components include:
Comparing your previous financial statements will help your analysis of your profit and loss statements. You’ll be able to identify trends when you compare this month’s statement to last month’s or to the same month last year.
A balance sheet lists the money or other things of value you own and what you owe to others. It also measures the ability of a company to pay its debts. The basic components of a balance sheet are:
Assets: What the company owns. This can include:
Liabilities: What the company owes. This can include:
Owners’ equity: The assets minus the liabilities. This can include:
One of the most important metrics often missed on financial statements is the “quick ratio” on the balance sheet. The quick ratio, also referred to as an “acid test,” is the business’s current amount of assets divided by current liabilities.
Banks favor the quick ratio metric as it provides a measure of the financial stability of a business and the ability to pay its bills. In most industries, the quick ratio should be greater than 1:1. It shows the company has more cash available than current money it owes. When the quick ratio goes below 1:1, your business may not be able to meet its financial commitments.
There are many good resources available to learn how to read financial statements monthly. Get help from your accountant or bookkeeper, or educate yourself online. Remember, your accountant is an advisor, not an adversary.
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