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Behind the Numbers – Understanding Your Small Business’ Financial Statement

by Tracey Hrica, EA Nov 15, 2019 | Share

I have a confession to make – when I started working for Century Accounting in February of 1995, I did not know how to read a financial statement.  I was 18 and didn’t even know what a balance sheet was – I just learned that to help our clients succeed and grow I needed to learn more than how to just “drop the numbers in!”  Luckily, over the last 25 years, I’ve learned a thing or two about financial statements.

So, in order for you, small business owners, to be successful, don’t you think it would be helpful for me to offer classes to help you to understand what all those numbers mean?  Well, the answer is – not exactly.  Because we are not selling financial statements – we never have, and never will.  Most of the businesses that we consult with today do not understand what they are looking at every month.  The numbers, as I’ve been told, intimidate them, overwhelm them and make them nervous.  Many are just happy to take the financial statements we send every month and put them in a drawer or filing cabinet, or better yet, leave them out in “the Cloud”.  They trust that we are looking over their shoulder.

And we are!  However, to be a successful entrepreneur today, it is even more important than ever to understand some basics so you can ask questions and make wise business decisions.  I’ve learned over the years to no longer be intimated by explaining the entire meaning of every page of the financial statements.  However, here are a few tips for reading financial statements, that I would like to point out, to help you be a better manager of your business:

  1. On the balance sheet (Statement of Assets, Liabilities and Equity), the total assets must ALWAYS equal the total liabilities plus the Equity.
  2. Review your accounts receivable number.  If customers are not paying you and this number continues to increase, that’s a problem.
  3. Look at your cash in the bank. For our clients, we prepare a bank reconciliation every month, for every bank account.  These amounts will not necessarily be (and probably won’t be) the same amount showing on their bank statement.  This could be due to outstanding checks and deposits in transit.
  4. On the Profit and Loss (Statement of Revenue and Expenses) page, most of our clients’ eyes go to the bottom-line profit or loss figure.  However, there is a wealth of information if you allow your eyes to travel back up the page.  Although the numbers may not jump out when there’s a problem, the percentages will.  Go down all your expense categories and look at the comparison of the monthly percentages versus year to date.  If there is a big difference, i.e. in July insurance was 8.1% of sales and year to date was only 2.5% of sales, that would be a red flag to look further or to call us to help you figure out what happened.    You can also look at the prior year to see if it was consistent.
  5. Your general ledger is the detail and back up for all deposits and expenses that occur each month.  If a percentage looks out of character, go to your general ledger, look under that particular account code.  Maybe you had an annual bill that was due, or an invoice may have been paid twice by mistake.
  6. Lastly, we know how busy you are.  Maybe lack of time is an issue. You say to yourself that you don’t actually have time to sit down and review the financial statements. Well, I know the perfect solution!   We offer several graphs as part of our financial statements.  They give you a quick (in color!) picture of the trends in your business.   You can quickly compare last year’s revenue to this year’s, and identify the top expenses you deal with each month.  Has this changed from previous years? My personal favorite is the bar graph.  It’s the quickest way to see the money that comes in versus the money that goes out. Are you making progress?

Don’t let your financial statements intimidate you anymore!  If you don’t currently receive financial statements, I encourage you to reach out to us about anything that you would like further explanations for.  Our clients are never on a time clock when they call us to discuss their business.  Short on time?  Email us your questions, and you will have answers awaiting you when you have time to sit down and go over them. This is the reason we are here – to “have your back” and to help keep your business running smoothly.

About the Author

Tracey Hrica, EA

Tracey Hrica joined the firm in 1995. She is an Enrolled Agent(EA), which enables her to prepare personal and business tax returns and represent clients before the IRS.

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