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“Got our year-end financials and need your input!!!”
Reading the financial statements for your business can be a very boring and unproductive exercise if you don’t know what you are looking at and what you are looking for. While entrepreneurs are rarely financial experts, they do have access to financial experts who can help answer their questions – which is part of the problem. Many entrepreneurs don’t know what questions to ask and are easily confused by the terminology, presentation and results found on their Balance Sheet and Profit/Loss Statement. Knowing what questions to ask can help you understand what you need to focus on and if you can find a way to keep your perspective simple, you might just unlock some hidden value.
As a quick refresher, a Balance Sheet is like a net worth statement for your business. It provides details on what a business owns, what it owes and how much equity it has – similar to your own personal net worth statement. A Profit and Loss Statement (also known as an Income Statement) is a summary of what a business earns, what it spends and what is left over as profit. Your business will use the profit it generates to purchase assets like equipment and inventory, or it will use its profit to pay off debt, creditors and other obligations.
3 Simple Questions To Ask When Reviewing Your Financial Statements
Did the business make or lose money for the period of time being reported?
When reviewing financial statements, start by taking a look at your Profit/Loss Statement and your bottom line. Did your business generate a profit or a loss? The reason this question is a good question to start with is because it will provide context for the other questions you will be asking.
- Can you reasonably increase your revenue? (Profit/Loss Statement)
Whether your business is making money or losing money you should be able to look at how much revenue was generated (not profit) and describe what would be required to increase it. Asking a question like “What would it take to double our revenue?” will help you understand where the current limitations in your business are and what would be required to overcome them. You may not be able to double your revenue but you should be able to understand what is limiting your growth.
- Is your bottom line as high as it could be? (Profit/Loss Statement)
Profitability is the key to staying in business. If your business is running a loss you need to ask yourself what would it take to make up the loss (or consecutive losses) in both dollars and strategy. If your business is running a profit you should ask yourself what it would take it increase your bottom line. Is it a function of cutting costs or leveraging existing costs to create more profit?
- Are you as the owner owed money? (Balance Sheet)
An often overlooked amount sitting on the Balance Sheet is the money owed to owners. This is usually in the form of a long term liability or some other form of a loan, but very few owners will have a strategy for paying it back. Because many small and medium sized businesses struggle to keep up with their financial obligations they miss the opportunity to strategize and plan for the owners getting back the money they have put into their business. Even if owners don’t take the cash out out of their business, the amount owed to them should be a financial goal that the business works towards hitting.
There is no shortage of questions that can be asked when reviewing financial statements. The trick for entrepreneurs is to keep the questions simple and to not let the presentation and terminology direct the dialogue. An entrepreneur should be focused on profitability, revenue growth and a strong balance sheet. The only way these things happen is to talk about them, set goals for them and create strategies around them. The next step…is to execute.