A robust, consistent reporting structure can make running your business easier in the long run.
As a business owner, it may seem easier to push off financial reporting until that time when it “has to happen.” After all, simply managing the day-to-day operations of the business can be enough to keep you fully occupied. But have you considered that implementing a process to maintain a robust, consistent financial reporting structure can actually make running your business easier in the long run? Think about some of the business decisions you face on a daily basis:
- Are my products and/or services priced in a way that maximizes my profit margin?
- Do I have the cash readily available to purchase or replace the equipment needed to run my business?
- Could I easily secure funds from a lender or investor in order to develop another product line or open an additional location?
Your financial reports can help you determine the answers to these questions and more.
Whether you’re a new business or an established one, whether you’re a sole proprietor or a larger company, every business owner should have a process in place that ensures the maintenance of solid financial reporting. Accurately tracking financial data is not only critical to running the day-to-day operations of your business, it’s also essential to your long-term growth and sustainability.
Choose a reporting frequency that works with your business cycle and stick with it. If you find that you need to review your company’s financial health on a more regular basis, you may opt to prepare updated financial statements on a more frequent schedule. If your business is governed by a board or other third-party partner that monitors your financial health, you may also consider a more robust financial reporting schedule. Regardless of the schedule you choose—bi-weekly, monthly, quarterly, etc.—the key is consistency. That is how you will maintain the most accurate and comprehensive picture of your business’ financial health.
Statements to Include
A solid regimen will most likely produce three key reports: the income statement (also called a profit and loss or P&L statement), balance sheet and cash flow statement. These reports will not only aid you as a business owner in monitoring company performance, they may also be used by external business partners (board members, investors, bankers, insurance agents, company vendors, etc.) to evaluate the strengths and weaknesses of the business.
The income statement evaluates financial performance over a specified period of time. It provides a summary of how revenues are earned and expenses are incurred through both operating and non-operating activities. This statement shows the net profit or loss a company incurs for the given time period.
Your balance sheet discloses your company’s assets, liabilities and owner equity/net worth. It outlines the means used to operate the company, equal to the company’s financial responsibilities and equity investments. Simply put, the balance sheet shows that assets equal liabilities plus shareholder’s equity.
A cash flow statement will summarize the cash inflows your company experiences from its operations and investment sources, as well as any cash outflows related to business activities within a given time period.
Analyzing Company Performance
Both internal and external parties, including potential investors and lenders, will use these three statements to analyze a company’s performance in three areas: liquidity, leverage and profitability.
Liquidity refers to how much cash the company has on hand to satisfy immediate needs. Leverage considers debt to worth (whether or not a company is able to satisfy their debt obligations by either selling the business or liquidating company assets) and inventory turnover (how inventory is managed and maximized for profit). Profitability looks at the amount of financial gain your business generates, typically measured by return on sales or the amount of profit generated per dollar sold.
The most successful business owners establish and maintain a consistent regimen that documents and preserves the integrity of their financial performance. This practice does more than simply help you create and operate your business through an accurate picture of your financial state. It also helps you make more informed business decisions regarding the pricing of your products and services. It helps you better understand your margins. It helps you recognize your cash flow. And, perhaps most importantly, it helps position your business for future growth. iBi
J. Boger Hessing is vice president and commercial relationship manager with Princeville State Bank. For more information, call (309) 693-9494, email [email protected] or visit p-s-b.com.