Reviewing financial statements on a regular basis can help you accurately gauge your business’ performance, guide strategic decisions and identify opportunities for growth. Practice will lead to proficiency, but what if you’re not sure where to begin? Let’s walk through two key reports: the income statement and balance sheet.
Income Statement: Sales, Cost of Goods Sold (COGs) and Gross Profit
Income and expense activity for a specified time period provides a benchmark for comparing current and past performance. The income statement reveals the following:
>Sales: revenue from purchases. What accounts for an increase or decline from the previous year? How can you maintain or improve sales?
>Cost of Goods Sold (COGs): expenses incurred to create and sell the products, such as materials, shipping charges and merchant credit card fees. An increase in the COGs as a percentage of sales will cut into your gross profit margin.
>Gross profit: income left over after paying for the cost of the sale that is used for operating expenses. Could you generate more profit by increasing your prices or sales volume, or negotiating lower pricing with vendors?
Other figures to review carefully on the income statement are: operating expenses; operating profit before taxes; other income and expenses beyond normal operations; income before tax; tax on income of the business; and net income, or the final profit after all expenses, including taxes, are paid.
Balance Sheet: Assets
You stand a better chance of weathering economic downturns if you effectively manage a balance sheet, which reflects your business’ ability to generate enough cash to pay bills. Here are the line items:
>Assets: current, which are easily converted to cash within a year (accounts receivable/inventory); fixed, or longer-term support for generating sales (equipment, employee vehicles); total of fixed, current and other (intangibles such as goodwill).
>Liabilities: current, or payments due within a year (accounts payable, loan principal, payroll taxes); long-term obligations due beyond one year; and total liabilities.
>Retained earnings: profit left in business since it started, which is important for building equity and reinvesting for growth.
>Net worth (Owner’s Equity): amount owners have contributed toward purchase of assets.
Making a habit of reading your income statement and balance sheet regularly will allow you to respond more quickly to changes that are required to meet your business goals.
With a loan from Northern Initiatives, you’ll have full access to a range of tools designed to provide insight into the financial management of your business. For a preview of these tools developed specifically for our customers, please view our small business video, Making Sense of Your Financial Statements: