Just like a person, a business has a pulse. It needs a pulse to stay alive. It may not need blood, but it does need cash and energy. Many business owners are in on the front lines and involved with day-to-day activity. They see what is going wrong and what is going right, if they listen. As a business grows the owner can get farther from the front lines and depend more on the financial statements. Being an accountant, I look to the financials to see how the business is going.
Here’s some helpful hints on how you can use your financials.
First make sure they are accurate. I find things on the balance sheet that get buried, lost or forgotten. Make sure you, as the business owner, understands each account. Ask questions.
Keep it simple. Too much information is as bad as too little. What questions do you want answered? Are sales increasing? Is the gross margin increasing? Is overhead staying constant? Where is our cash going? Did we make a profit?
Know where the income is coming from. The old 80/20 rule – 80% of the income comes from 20% of the customers or products or services. Do you know which customers are profitable, which products or services you sell are the most profitable? Accounting systems have profitability reports. Use them.
Where is your cash going? The Statement of Cash Flow report is helpful. In times of growth the business can use cash faster than it generates it.
Debt. Know how much you need each month to stay alive. Overhead along with debt payments are normally locked in. When a recession shows up those with high debt are at risk. Monthly debt payments provide little flexibility when sales, profits and cash is tight.
Use rolling months – last 12 months. Comparing key numbers – sales, gross margin, overhead, staffing and net income. Look for positive trends.
Diversification. We learned when COVID hit that any business that only met in person, got wiped out. Only 1 of one thing is dangerous. Watch out for the following:
- One customer – if they change suppliers your bottom line is hurt
- One supplier – if you lose that one, you may be scrambling to get product
- Only one source of new customers – if Facebook kicks you off, you are out of luck
Consistency. Are the financial results consistent? Every business needs a strong team to produce financial results consistently. The business also needs systems and procedures to produce consistent financial results. If you go on vacation, does the business lose money?
Financial statements tell us the history of the business. It provides a way to measure your success. They are just a tool that you can use to learn more about your business and make decisions. If the profits and the cash balance are increasing – the pulse is strong.
We offer strategy meetings, a chance to ask questions about your financials, to learn more about the game of business and assist with setting up the financials and systems to meet your needs. Call our office and set up an appointment with Mary, 920-351-4842.
Mary Guldan-Lindstrom, CPA