Managing and Using Financial Statements
Managing and Using Financial Statements: CPA Advises Gwinnett Entrepreneurs on Reading Business Financials
Whether your business is a billion dollars in revenue or a start-up venture in your basement, learning to read your business’s vital statistics is critical to your company’s profitability and even its very survival. Nestled closely nearby His CPA continues in the search for excellence in assisting business owners in organizing their internal financial data.
Financial statements act as a warning bell helping the entrepreneur who reads them to become aware of trends, aberrations, calamities and successes. An owner who is well versed in reading and reviewing financials will always have a leg up on those who do not.
The words of the Bible teach us not to lean on our own understanding as by ourselves we are much more probable to wallow because of our limits and our own ineptness and though we are exhorted as Believers to seek wise counsel we are not to unnecessarily lean on others for all of our wisdom. “Plans fail for lack of counsel, but with many advisers they succeed”- (Proverbs 15:22). If our vision is too limited, we are unnecessarily handicapped and need a broader view in order to converse with the very professionals we all so desperately need.
Though a CPA, as a trusted adviser and friend, will dramatically strengthen your decision making ability, having equipped yourself with sufficient knowledge will prove invaluable as you plot your business steps. Being able to avoid miscues that befall your competitors will protect the gift of your business, which God gave you to provide for your family.
Cash is King
A solid business model will always require sufficient resources to meet the financial obligations of a business as they become due. To this balance, an owner will want to ensure there are substantive excess capital and lines of credit to meet varying and unexpected needs. Regardless of your accuracy as a planner and being able to anticipate the future events and needs of your business, there will always be circumstances and capital needs which arrive on the horizon that all of your contingency models have not anticipated. Thus, it is imperative that you maintain ample surpluses and reserves for such events.
Accounts Receivable
Accounts receivable are the second most valuable of all of your business’s financial assets. Though you are not able to spend accounts receivables, they pale in liquidity only to your cash balances. There are many businesses such as retail that will not carry receivables, as their business is a cash and carry venture, which requires each and every purchase to pay for goods and services at the time they are received.
The best time for billing is at the time a service is rendered or a product is delivered. At that moment both you and your client are best informed as to what was agreed to and delivered. It is also this point of time an owner should be sure to verify that all items sold are billed for, the very best possible product was delivered and that due care was given to job costing considerations. Billing decisions will be paramount to your year-end profitability. After a bill is sent, there will never be another opportunity to influence the year-end results of your business.
Though each and every business and industry are specific as to the norm for billings and payments, it is wise to track two critical components in evaluating cash balances:
- Days in Receivable – This statistic calculates the number of days an item is in receivables relative to the sales volume. It is better to have your days in receivables lower than higher as this means there is less time between when a billing is sent and when it is collected.
- Aging Balance – A preparative of your aged accounts receivable will place your balances into columns based upon their age. This allows for a receiver to quickly review and access the status of all unpaid monies and to determine any specific collection steps that are warranted.
These calculations/reviews should be done at least monthly and more often as situations and sensitivity warrant. Tracking and comparison to prior periods will give an astute owner an early detection system to preclude and make corrections prior to unnecessary/unwarranted trends before they worsen and become problematic.
Accounts Payable
Due care and planning should always be exercised to ensure that all vendors, independent contractors and trade payables’ are paid on a timely basis. Individuals and companies who provide to and service your business should be able to always anticipate prompt and timely payment. Though most vendors will never have a security interest collateral or personal guarantee ensuring their payment, you should hold these monies in trust for them nevertheless. In fact, prudence would suggest that you never request or incur services if you do not have the cleared funds already in your account with them being specially earmarked accordingly. A business, which is not able to pay their just debts as they become due, is one whose business model is not working and their time potentially short lived.
Gross Margin
Your profit and loss statement contains a recap of your business operating results and summarizes the positive and negative influences of every business decision you reach. Though many of the balance sheet indicators are somewhat lagging to predict a firm’s success, the profit and loss statement dramatically states and presents current financial data. There is no statistic, computation, component or percentage as important as a company’s gross margin. Beguiling a tale of success or failure the calculation of a business cost of goods sold and corresponding margin of profitability speaks volumes as to the firm’s management ability. Pricing of a ventures products and services are an integral component of ongoing operations.
A persistent review of pricing and a comparison to the corresponding costs to create these products or services will determine a firm’s niche in the market place, and its competitive advantage in the business climate in which it serves. A continual pattern and scrutiny of your gross margin will better enable you to maximize your operating results. Beyond a shadow of a doubt you cannot sell yourself out of a slump. On the contrary, if you persist in selling at below acceptable prices/standards, you will unnecessarily perpetuate an otherwise avoidable result. Gross margin analysis and their corresponding changes to operations dramatically heighten the probability of your business’s sustainability.
Discovering the pulse of your business is critical to hearing its needs and for its care and feeding. We work with clients everyday to both decipher and discern their business’s heart beat and to help you understand the nuances of what makes your business tick. Call us today to learn how you can discover the plethora of information available to help you run your business efficiently and profitability.