Financial statements…every business produces them…or should. In most small businesses or SMEs, they are most likely prepared monthly or quarterly and certainly should be prepared more often than only annually. Of course, the more frequently financial statements are prepared, the better. During the current financial crisis caused by the global pandemic, financial statements can help move a business forward.
The compilation of numbers seems to either have a love or hate relationship with business owners. Those who understand the true treasure of the information embedded in financial statements love them. On the other hand, business owners who fear the numbers and find financial statements full of mysteries hate them.
So, the group of owners who understand the numbers know that financial statements when prepared correctly and timely can be a tremendous asset to their businesses. Conversely, those who fear financial statements can actually be hindering their businesses by not using the financial knowledge to drive their businesses forward.
Financial knowledge is a powerful tool that enables business owners to use what happened in the past to improve upon the future. Rather than only reacting to something that already occurred, correctly analyzing financial statements allows an owner to make proactive, forward-thinking decisions that are important in operating within today’s economic environment.
More Than Mere Numbers
Certainly, financial statements are a conglomeration of numbers neatly printed in an orderly format. Financial statements, however, are much more than mere numbers. They tell a complete story about a business. When the right questions are asked, information is revealed about a business that goes far beyond revenues and expenses…and assets and liabilities. The numbers tell how a business is operated, what produces a profit, if goals are being met, or what might be changed in the future to improve performance.
How does a particular expense affect revenue? Did a particular marketing campaign affect incoming traffic or phone calls? This was an action, what was the effect? It is amazing the information that is contained in financial statements, but the right questions must be asked and the data analyzed.
Now or Later
For a small business owner pressed for time, a decision has to be made when the financial statements should be prepared…monthly or quarterly (hopefully, not annually). An owner might ask, “If I’m not going to read them, why should I prepare them?” Good question. Of course, financial statements should not only be prepared on a timely base but read, studied, and analyzed. If not, the financial statements are like a book sitting on a shelf with the cover never being opened. No one knows what’s on the inside. It’s the same with financial statements. If prepared and not reviewed, the small business owner never knows the treasures that exist on the inside.
The Treasure Chest
Financial statements yield much more than a net profit or net loss figure. When summarized on a spreadsheet by month (or quarterly or annually), the reader can view an entire history of the business and discover:
- Positive or negative trends for revenue, expenses, assets, and liabilities
- Anomalies showing up in specific accounts
- Conversion of dollars (or other currencies) to percentages allowing for supplemental trend review and out of the ordinary financial occurrences
- Sources and uses of cash critical in forecasting future cash flows and needs
- Gross profit analysis by products, services, or location
Asking questions, seeking answers, and taking corrective action where and when warranted allows a small business to direct energy and concentrate efforts in areas that will yield the most immediate and positive results. During economic downturns and resulting recoveries, decisions many times have to be quick and decisive. Having the right information available to make such decisions is imperative.
Demystify Financial Statements
Financial statements should be a friend to any business owner rather than a foe. Rather than becoming overwhelmed with a multitude of numbers, take one account at a time, review it, analyze it, and then take appropriate action if warranted.
