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    3 Financial Reports Every Business Owner Should Live By

    Posted by Sylvia Lagerquist, CPA

    3 Financial Reports Every Business Owner Should Live By

    Owning a business often feels like living permanently on a merry-go-round. Once you have operations running smoothly, you need to urgently address marketing. As soon as marketing is generating results, you’re focusing on improving sales. After you get sales humming, you’ve got to address human resources. And after that…back to operations.

    In the midst of the ever-spinning merry-go-round of business ownership, there are three critical core competencies that you need to address consistently, at all times — and not as a functional silo.

    The first two are your business strategy and your leadership team. Without the right underlying business strategy, no other part of the business will run effectively. And without the right leadership team moving forward together, your strategy – once formed – will fail anyway.

    The third always-present core priority is your financial situation. After all, without money, you can’t implement a strategy or hire the right leaders to join you on this journey. In fact, failure to effectively manage financials means jeopardizing everything else you do to improve the business.

    That’s why it’s essential that, as a business owner, you become conversant with key reports that should constitute the cornerstones of your daily, weekly, monthly and annual efforts. Put another way, these reports can tell you how your company’s heart is doing and how well the blood is circulating, while you turn your attention to various organs and systems.

    So, what are the 3 most essential reports that you should use to check on the lifeblood of your business?

    1. Begin with your balance sheet.

    The balance sheet is where it all begins, and where you should too. After all, the balance sheet is the fastest way to get a handle on the financial position of your business.

    Your balance sheet is a financial statement that summarizes the company’s total assets (what the company owns), less liabilities (what the company owes). This, in turn, identifies the owner’s equity (what the owner has at the end). The balance sheet looks at your business at a specific point in time, which is why it is usually examined at the end of a period.

    2. Investigate your income statement.

    The income statement is your second stop. Also known as the profit and loss statement (P&L), it shows the revenue, expenses and profit/loss of the business over a given period of time (generally a specific month, quarter or year).

    Your income statement can be used by internal leadership (including you, the business owner, and your management team) to assess the company’s profitability. This will also enable you to asses the risks or opportunities the business presents (which makes it invaluable for potential investors or for bank loan officers).

    3. Critique your cash-flow statement.

    Once you have a clear picture of your overall financial position and your profit and loss, you need to make sure you have sufficient liquidity to meet the needs of the business.

    Remember that one of the biggest mistakes a small business owner can make is to focus on profit at the expense of cash-flow. It is very easy for a company that is growing to show profit, even as it risks running out of cash. Therefore, keeping a close eye on the cash-flow statement is critical to your company’s health.

    The cash-flow statement enables you to examine how readily the business can meet its obligations for debt and interest by summarizing and presenting all inflows and outflows of cash over a given time period.

    What makes the cash-flow statement unique is that it does not include non-cash activity such as depreciation, and instead only concerns itself with cash activity.

    The cash-flow statement is organized into three sections: operating, financing and investing. It uses this three-part framework to demonstrate where cash is being generated or consumed.

    Another advantage of the cash-flow statement is that it can be invaluable to you as the business owner when you need to forecast future cash flows in order to create budgets or plan for future growth decisions.

    These three reports collectively constitute what most CEOs, CFOs and CPAs consider the standard financial statement package. You should be examining them weekly as a matter of good management, and reviewing them formally at the end of each month once you complete month-end activities. This enables you to generate key performance indicators (KPIs) that can be tracked every day to monitor the health and progress of the company.

    Depending on what financial systems and software your company relies on, you should be able to easily generate and manage by these reports on a regular basis. Incorporate them into your own review process, and into your management team meetings as well.

    To learn more about how you can customize financial reports to meet your management accounting needs or enhance your accounting software to make reporting easy and seamless for you and your leadership team, consult with a qualified CPA firm.

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    Image Credit: davedugdale (Flickr @ Creative Commons)

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