My View: Why you should review financial statements monthly
Originally published in the Phoenix Business Journal by Ruth Urban. To view the original article, click here.
In this guest column, a Valley accountant looks at how business owners can get ahead of the game by reviewing financial statements regularly and offers tips on best practices to grow your confidence as a business owner in “the know.”
The first conversation I have with business owners revolves around why it is important for them to have accurate financial information about their business. Often, they will tell me they need it mainly for their tax preparation. Wrong answer! I encourage these entrepreneurs to review their financial statements monthly and not wait until tax time. Doing so will grow your confidence as a business owner in “the know.”
Your income statement (also called profit and loss) summarizes your revenue and expenses for a specified period of time. Study it carefully so you can easily spot irregularities. This is where you can catch and explore sudden increases in specific expenses. Ask yourself why your marketing expenses might have doubled, for example. It could be expected, but it could be miscategorized, or you might even discover questionable activity in your account.
Comparing month after month or year after year will help you set your goals and determine whether you are meeting them. If things are going well, you will be able to celebrate as you notice your profits growing steadily.
The balance sheet is the most misunderstood of the financial reports, especially by novice business owners. While the income statement is for a period of time, the balance sheet is a snapshot of the business at a specific point in time. The balance sheet lists the assets of the business, such as bank accounts, equipment and accounts receivable, as well as the liabilities which include outstanding accounts payable (bills and loans due). The third section of the balance sheet is titled equity. Equity gives the reader an idea of the value of the business if the assets were liquidated and the liabilities paid off.
Built around numbers
A common question from an owner is, “Why doesn’t my cash in the bank equal the profit shown on the books?” This is where the balance sheet plays a role. As you pay off debt, you reduce the amount due on your balance sheet, but the amount paid does not show up as an expense on your income statement (only the interest is an expense). Therefore, your bank balance decreases by servicing your debt, but your business still shows a profit.
Your cash flow statement is important because it gives you an idea if you have enough cash to cover any of your payments due. Use your cash flow statement to help determine how frequently you pay your bills, and if you can pay them in full. Cash flow is a measure of liquidity of the business.
Budget vs. actual: If you created a budget to determine what your financial year will look like, it is important to monitor it regularly. If the cash is not coming in as expected, or you are spending more than anticipated, reviewing this report will give you time to adjust appropriately, whether it be clamping down on spending, or revving up your sales efforts. Or, it might just give you a reason to cheer that your business is doing better than expected.
A successful business is built around numbers. Know yours inside and out. If you don’t understand, schedule an appointment with your bookkeeper or accountant and have your questions ready. Doing so will give you a head start while growing a winning business.
Ruth Urban is president and CEO of On the Money, a Phoenix accounting advisory, bookkeeping and profitability consulting firm.