Use Your Financial Records to Predict Future Challenges
Your financial statements give you a gauge to check the stability, profitability, and solvency of your business, making it critical to understand your numbers. You can use the statement of owner’s equity, cash flow statement, income statement, and balance sheet to learn from past mistakes (or successes) and improve your prospects for long term success. Here are 5 critical numbers to keep track of as you look through your records:
- Capital Structure and Debt Levels (Balance Sheet)
- Cash Position (Balance Sheet)
- Savings and Working Capital (Balance Sheet)
- Net Profit or Loss (Income Statement)
- Payroll Expense Trends (Income Statement)
Start With the Balance Sheet
Starting with your balance sheet, you can see your assets relative to your liabilities and owner’s equity. In particular, you can look at your cash and cash equivalents, to determine whether or not you have enough money to pay your upcoming bills. You can also look at your debt levels to determine if you’ve borrowed too much money or not enough, relative to your ideal capital structure. Your balance sheet paints a basic picture of your financial position, but you need to see income and cash flows to get a better view.
Compare Income & Cash Flows
Your income statement tells you about your gross income, cost of goods sold, payroll expenses and operating expenses. All of this information can make or break your business. You must watch your gross margins and your net profit margin, along with trends in expenses and individual revenue line items. Combine this information with your cash inflows and outflows, and you can understand your ability to pay your bills even better.
How to Identify Your Biggest Expenses
When you format your profit and loss statement, you can include a column that measures expenses as a percentage of gross revenue. Doing so will help identify the largest expenses on your P&L. However, your income statement line items will likely be aggregated and it may be difficult to ascertain why specific categories are high. At this point, running a general ledger detail report is key for finding out drivers behind expenses.
Your financial statements paint a picture of your financial health and display your successes, misses and areas for improvement. When you combine your balance sheet, income statement and statement of cash flows, you get a well-rounded indication of your financial position. Learn well from your financials and improve your position.
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