A new year is just around the corner. Be prepared by assessing your company’s financial health and readiness for 2020.
Your financial statements are the indicators of your business’ financial health and enable you to track your progress, identify deficiencies, and make adjustments if needed. But business owners often don’t know exactly what to look for, or where. Take time now to learn your way around the three primary financial reports that provide you with the information you need to stay on top of your company’s financial status.
The balance sheet gives you a snapshot of your financial position at a specific moment in time. Assets equal liabilities and equity, so the balance sheet is a good test of whether your numbers actually add up. The balance sheet is also a tool for calculating net worth – subtract total liabilities from total assets. And it allows you to assess two key performance indicators.
- Debt – By dividing total debt by total assets, you’ll see what percentage of your assets is funded by debt. Then you can evaluate whether you need to make changes. How effective are you at managing your debt? Do you owe more than you can comfortably repay? Should you modify your spending practices, find ways to cut costs, or develop some debt reduction strategies?
- Liquidity – Your assets may be in many forms – from cash on hand to real estate holdings. Review your assets – which should all be listed on your balance sheet – and determine how quickly those assets can be bought or sold. You may have plentiful assets but cash may be scarce. It may be necessary to consider a different mix of assets to ensure that you have sufficient liquid assets to cover your short-term cash requirements.
The income statement illustrates revenue versus expenses during a specified time period. With this information you can calculate critical numbers like gross profit, operating income, and net income. Net income is, of course, a major indicator of your business’s profitability and financial health. It is the amount your company is left with after paying off expenses.
The income statement can help you analyze your bottom line. Compare your earnings to sales forecasts and your expenditures to budget.
Cash flow statement
The cash flow statement illustrates how your business moves money around – where cash is coming in and where it’s being spent. Tracking operating, financing, and investing activities, it’s a great tool to help you manage finances and make informed business decisions.
Positive cash flow equates to having funds to reinvest in your business and is an indicator of good financial health. If you have cash remaining after buying, maintaining, or improving fixed assets, you have what is referred to as “free cash flow” which signals that you’re positioned well for growth.
Once you’re able to navigate and interpret your primary financial statements, you’re equipped to assess where you stand this year compared to your projections from last year, and to prepare next year’s budget. If your numbers aren’t adding up as expected, determine whether you need to readjust your spending. If your financial status is positive, consider where and how you can best reinvest in your business.
If you’ve had difficulty assessing the numbers you need or your financial statements are not up to date, consider reorganizing your accounting processes, upgrading your financial software, and getting a professional assessment of your financial situation. Contact The Minerva Group for a review of your financial statements and procedures. We’re equipped to not only help you clean up your books and streamline your accounting methods, but to position your company for growth and drive your business forward in 2020.