It's an income statement, financial reports, charts, and spreadsheets . . . if you’re like most people, your eyes may glaze over when this topic comes up. Accountants like to create vehicles to track the numbers. That’s what they do. Someone has to, right?
There are revenue forecasts, costs of customer acquisition, marketing budgets, and amortization schedules, whatever those are. But there are three financial statements that you should look at each month to “take the pulse” of your business and make sure there are no irregular heartbeats that indicate your business may soon be on life support.
The first of these is your income statement. You may have heard this also referred to as a profit and loss statement, or simply the P & L. Income statements show your revenues (the money your business has earned or gross profits), your expenses (the cost of goods sold and other expenses of running your business), and what is left after the expenses are paid (revenues minus expenses or your net profits).
However, there are other indications of the health of your business. The income statement does not show money that is acquired from loans or equity sold to investors. It doesn’t account for cash draws that the owners may take or divisions of the business that may be sold. Just as a medical checkup may indicate that LDL cholesterol levels are low, but your white blood cell count is high. You have to look at other numbers to show that your business is healthy.
A balance sheet is another number that should be checked monthly. Even with high profits, your company can be losing ground in its value.
The balance sheet shows the company’s assets and liabilities. Assets are the money in bank accounts or investments, computers, motor vehicles, or other physical assets the company owns, accounts receivable (amounts charged to customers but not collected), etc.
Liabilities on the balance sheet would be mortgages or other debts, payroll for work performed but not paid yet, accounts payable (amounts billed to you but not paid), etc.
By tracking the assets and liabilities on the balance sheet of your company, you will know if your business is healthy and growing or atrophy is causing your company’s value to waste away.
Cash Flow Statement
The final statement that should be checked monthly is the cash flow statement. The cash flow statement takes the net profit from the income statement and accounts for changes in the amount of equity in the business shown on the balance sheet. This lets you know what cash you have available for paying bills, payroll, and debt payments.
If your income statement shows you made a $30,000 net profit last month, you would have to check the cash flow statement to know that your partner spent $50,000 on a lavish party for the vendors. That’s why you don’t have enough money to make payroll this week.
Cash flow statements track profits, but also how the money was used. It also shows cash draws and expenses and lets you know what should be in the bank to cover future needs as they arise.
Any person looking to understand their numbers with a clearly defined system can achieve this confidently by implementing a few tools and finding the right partner to walk beside them. Let's have a conversation about this today.
The Bottom Line
While you may not need to know every nit-picking number at the drop of a hat, you should know your net profits. You should know your company’s value and the working capital available each month to truly know if your company is healthy or sick. Write these numbers on the back of a business card and carry them in your wallet. You may have to know quickly and be able to see how your business is trending.