Unfortunately, many business owners don’t know how to read financial statements or even why they have them. Yup, they are in your drawer, somewhere…next to the trash can… (In the trash can)…but certainly out of sight, out of mind; just in case the banker asks to see them. Face it, people who are looking at the financial statements are usually creditors and investors. What’s the big deal anyway? After all, they report the past. Who cares, it’s already happened and there isn’t anything that will change it. In this day and age, looking at the past is rarely appealing to anyone. But what if you can predict the future? Hmmm…
Let’s pull those financial statements and look for warning signs!
Balance Sheet (assuming accrual basis): Accounts Receivables (A/R) – Higher A/R might be a good thing if you can collect them. Dig deeper to see the aging breakdown. How many are outstanding for 30/60/90 days? If the majority are over 90 days, that would suggest you have a problem with collections or establishing appropriate credit terms. Once you understand the “real problem”, there are multiple ways to improve this number. Why invoice reminders are your secret weapon to getting paid on time. When to consider factoring your accounts receivables. Like anything, the real key is understanding the real issues.
Income Statement: Revenue – Compare multiple years. Is the revenue slowly decreasing every year? Do you know why? Are you losing clients? Did you change the services you are offering? Do you have a pricing problem or perhaps a staff member is stealing from you. It is important to define the issue or issues to understand why and what to do about it. Without a correction, this means less money will be flowing to your business, less money for salaries, new equipment, etc.
Cash Flow: Investing Activities as Reflected on a Cash Flow Statement – Have you ever wondered “where did all the money go”? This statement helps answer that question by breaking activities into operations, investing, and financing activities. It is important to know the difference here. Cash out is reflected as a negative number while cash in is reflected as a positive one. If net cash flow is a negative number it means the company is investing money into new and better equipment. So a negative number is seen as a positive thing. It shows that the company is investing in new equipment, keeping up with new technology, etc. Have you ever thought “no way did I make that much profit (or loss)? Have you ever looked at a statement of cash flows for your practice?
If you would like to learn 5 more signs, sign up here: