Most business owners receive financial statements. Fewer actually use them to make decisions.
Your profit and loss statement and balance sheet shouldn't simply be documents you send to your CPA at tax time. When they are accurate and reviewed regularly, they can help you understand what's working, identify problems earlier and make better decisions about where your business is headed.
The goal isn't to turn business owners into accountants. It's to help you understand what your numbers are telling you—and what questions you should be asking because of them.
Is Your Revenue Really Growing?
Revenue is an obvious place to start, but the top-line number doesn't tell the whole story.
Look at revenue over time. Is it increasing, decreasing or relatively flat? Are certain services, products or customers driving most of the growth? Is revenue seasonal? Is your business becoming overly dependent on one customer or source of income?
Comparing current results with prior periods can reveal patterns that aren't obvious when you look at a single month's numbers.
And remember: more revenue doesn't automatically mean a healthier business.
Are You Becoming More—or Less—Profitable?
A business can grow substantially while becoming less profitable.
If revenue increased 20% but payroll, overhead or other expenses increased 30%, that's something worth understanding.
Your financial statements can help you monitor gross profit, operating expenses and net income and identify areas where margins are changing.
The important question isn't simply, “Did we make money?”
It's also: “Are we making enough money relative to the amount of work, risk and resources required to generate it?”
That can lead to important conversations about pricing, staffing, expenses, service mix and growth.
Where Is Your Cash Going?
One of the most confusing realities for business owners is that a profitable business can still experience cash-flow problems.
You may have recorded revenue that hasn't been collected yet. You may be making loan payments, purchasing equipment, building inventory, paying taxes or taking owner distributions. Those activities can affect cash without showing up on the profit and loss statement in the way you might expect.
That's why reviewing the balance sheet and cash flow—not just the P&L—is important.
If the business looks profitable on paper but the bank account tells a different story, it's worth finding out why.
Which Numbers Matter Most to Your Business?
Every business has numbers beyond revenue and net income that can provide valuable insight.
Depending on your company, those key performance indicators, or KPIs, might include gross profit margin, labor costs as a percentage of revenue, average revenue per customer, accounts receivable, customer concentration or another measurement specific to your business.
You don't need dozens of KPIs.
A handful of meaningful measurements, reviewed consistently, can help you spot trends and make decisions earlier.
The right question is: Which numbers actually help me run this business?
Are Your Financial Statements Helping You Look Forward?
Financial statements tell you what has already happened, but their greatest value may be what they help you do next.
If you're considering hiring another employee, buying equipment, taking on debt, expanding into a new market or making another significant investment, historical financial information can provide the foundation for projections.
For example, before hiring someone, you can estimate the full cost of the position and determine how much additional revenue the business may need to support it.
Before making a major purchase, you can consider its impact on cash flow and profitability.
That's when accounting information becomes a business-management tool rather than simply a recordkeeping requirement.
When Should You Talk to Your CPA About the Numbers?
Don't wait until something goes wrong.
If revenue is growing but cash is getting tighter, margins are shrinking, expenses are rising faster than expected or you're preparing to make a significant business decision, those are all good reasons to have a conversation.
An experienced CPA can help you put the numbers into context, evaluate alternatives and understand the potential financial and tax implications of your choices.
Sometimes the most valuable thing your CPA can provide isn't an answer. It's knowing which questions to ask before you make the decision.
Julie Moran, CPA works with small-business owners in Massachusetts and across the country to turn financial information into practical insight for better business decisions.
Want to better understand what your numbers are telling you? Schedule a Call with Julie. https://calendly.com/julie-juliemorantax/30min
Frequently Asked Questions About Understanding Business Financial Statements
Which financial statements should a small-business owner review regularly?
The profit and loss statement and balance sheet are two of the most important. Depending on the business, a cash-flow statement, accounts receivable report and other management reports can also provide useful information.
How often should I review my business financial statements?
Many established businesses benefit from reviewing financial results monthly. At minimum, regular quarterly reviews can help owners identify trends and problems before too much time passes.
What's the difference between profit and cash flow?
Profit measures revenue and expenses under accounting rules. Cash flow reflects money actually moving into and out of the business. A company can be profitable and still experience cash shortages.
What are KPIs for a small business?
Key performance indicators are selected measurements that help an owner monitor business performance. The right KPIs vary by company and might include profit margin, labor costs, accounts receivable, customer concentration or revenue per customer.
Can a CPA help me understand my financial statements?
Yes. A CPA can help you interpret financial results, identify meaningful trends and use the information to evaluate business decisions—not simply prepare financial information for tax purposes.
This article provides general educational information and is not intended as individualized tax, accounting, financial or legal advice. Business circumstances vary. Consult your professional advisors regarding your specific situation.
