Reality Check: Ask Questions About Your Financial Statements
Financial statements may look complex and intimidating, but these accounting records actually are helpful tools. Understanding financial statements is an essential skill for business owners. Financial statements help business leaders make decisions based on the economic health of their companies, not on guesswork or gut instinct. Hard data shines a bright light on business finances, sometimes providing a much-needed reality check. By asking questions about their financial statements, business owners gain a better understanding of their financial position. The result? Smart business decisions.
Study Your Financial Statement
Financial statements are a treasure trove of fiscal information, especially the Income Statement and Balance Sheet. Business owners familiar with these two financial statements gain valuable insights into the past, present, and future of their company. To learn more, read Accounting Tools’ article, Which Financial Statement is the Most Important?
Income Statement Lists Revenues & Outlays
An Income Statement, also known as a profit and loss statement, is a list of revenues, expenses and profitability for a set period, typically monthly, quarterly or annually. This financial statement includes details like the amount of sales, operating expenses, payroll expenses, and interest paid. An income statement offers historical data for comparison over time.
When reviewing the Income Statement, here are some questions to ask:
- What surprises, if any, do you see?
- How does the gross profit and net profit from your last income statement compare with the figures from this time period?
- What categories on the report would you like to increase or decrease? What steps do you need to take to accomplish this?
- What waste can you identify and replace with efficiency?
- Do you have a need to borrow money? If so, does your income statement position your business as a good credit risk that lenders will extend credit to? If not, what steps are necessary for improvement?
- Is your budgeting on track? Compare your budget figures to actual data, and note any discrepancies. Can you explain the discrepancies?
Balance Sheet Shows Overall Valuation
A Balance Sheet is a snapshot of a company’s financial position, showing what it owes and owns at a specific time. The balance sheet shows a company’s assets on one side and liabilities on the other. Assets including receivables (money owed to you) and cash on hand, plus equipment, real estate, and anything else with financial value. Liabilities represent money owed to others, like bills to be paid, salaries due in the future, credit card balances, and loan payments.
When reviewing the Balance Sheet, here are some questions to ask:
- Did my cash on hand increase or decrease from last period to this period?
- Do I have enough cash and current assets (like accounts receivable) to cover current liabilities (like accounts payable, credit cards and the next loan payment)?
- What is currently in accounts receivable? Are there past due customer invoices that need follow up?
- Is there excess cash not needed for immediate operations?
- How much should be reinvested into the business, to grow the business?
- Do I have positive or negative equity (assets less liabilities)?
- What future expenses do I need to plan for?
Know Your Company’s Financial Position
To gain insight into business finances, it’s worth your time to learn how to read financial statements. By asking the right questions, business owners can create strategies based on data, not just going with what’s worked in the past, or worse yet, just by guessing.
Contact Prosperity Bookkeeping
Relevant, up-to-date, and accurate financial records provide the foundation for smart business strategies. Contact us to learn how we create accurate financial statements for clients. By partnering with Prosperity Bookkeeping, you can make your next financial decision with confidence and solid financial data.