We all love to see the revenue roll in, right?
But beyond being in the black, how well do you really understand your business’ financial performance? Most owners focus on the Income Statement because it feels most relevant but to understand the whole picture, you need to understand the basics of the Income Statement, Balance Sheet and Cash Flow Statements.
- The Income Statement:
Reviewing your Income Statement monthly is critical. Not only does it report on your company’s revenue, but it also outlines your gross margins, staff cost ratio, overhead expenses and net income. Maintaining target ratios for these key metrcis.
By reviewing this report monthly, you ensure that financial decisions are being proactively managed and that you have accurate information to make business decisions.
- The Balance Sheet:
A highly underutilized tool, the Balance Sheet reports on your business’ assets, liabilities and shareholder equity at a point in time. Why review you Balance Sheet monthly?
This report provides you visibility to your cash balance, how much you are owed, how much you owe, and the total of your life to date earnings/losses. Since your bank account is almost never your actual cash balance, this report provides greater insight into your true financial standing.
Reviewing this report monthly also ensures that payments for items such as government liabilities (i.e. HST and payroll taxes) are being paid regularly and on-time, avoiding steep financial penalties.
- Statement of Cash Flow:
We all know Cash is King! Given the importance of cash to any small business, the regular review of this report is vital.
In the most simplest terms, the Statement of Cash Flow summarizes cash spent and cash generated by operations (day to day business activity), investments (usually purchases of fixed assets) and financing activities (new borrowing or repayment of loans).
You should be forecasting your cash for the next 90 days, particularly for creative firms that are often paid in advance for work by clients. Sadly that strong cash balance often doesn’t belong to you! Your Statement of Cash Flow should earmark these payments for future work/costs and plan for other payments such as government liabilities, salaries, rent and any additional overhead.
That’s it, not so bad right?
By reviewing these three financial statements EVERY month, you will ensure that opportunities and risks are identified early.
You will feel secure knowing that decisions are being made with clarity around the financials.
You will feel confident knowing that at any given moment you can see the ‘Big Financial Picture’ for your business!
While these three statements give you big picture clarity on your business performance, they don’t do much to shed light on operating performance. In addition to the Income Statement, Balance Sheet and Cash Flow Statement, your accounting partner should produce reports to provide you with visibility into things like client profitability, efficiency, growth rates, economic dependence, etc.
At FIN/ALLY, you can be certain that this will be included as part of your monthly fee.