You’ll recall the overview of the 5 stages of growth that businesses of every type or size experience, if they survive, as discussed in the April 11 post. Today we’ll explore how three standard financial statements can help business owners maintain the health of their venture and position it to survive long enough to pass through the growth stages and grow as intended. Actionable data—Key Performance Indicators— are waiting for you in those financial statements and the numbers will show you how to best manage your entity.

Math might not be your strength but little by little, you can learn to recognize and interpret the numbers and allow your KPIs to do their job and function as guard rails that will make you an astute decision-maker. Running a business is all about making informed decisions that help your business operate efficiently and grow successfully. Just as your primary care physician monitors numeric values associated with certain of your bodily functions—-vital signs, your personal KPIs—-you do the same for your business.

Because 70% of businesses will fail after 10 years and you don’t want it to happen to you, let that scary thought motivate you to keep both hands on the wheel and manage your business wisely. There are many factors to evaluate, including your client list and the sales of your products and/ or services, but today’s focus is the financial management that your monthly or quarterly bookkeeping statements allow you to do. BTW, those statements also make preparing your quarterly and annual tax forms are more efficient and less stressful process.

Basic 3 financial statements

• Income (P & L) statement. The income statement, also known as the profit & loss statement, is also known as the profit-and-loss statement. It sums up the money you collected from operations plus any other gains, as well as the money spent over a specific period of time. The basic formula is: Net Income = (Total Revenue + Gains) – (Total Expenses + Losses). You want your net income to be positive.
• Cash-flow statement. The cash flow statement shows whether your business can pay its bills. This will give you a sense of where your business’ cash will come from and where it will be spent. Here you can also see customers that may “slow pay” to decide if they are putting your cash position in jeopardy.
• Balance sheet. Your balance sheet summarizes your company’s assets, liabilities, and owner’s equity (or investment in the business), providing a snapshot of the financial health of the business at a point in time.

Trend analysis

Looking for trends can help you determine which products or services to promote, keep in stock, or stop selling altogether. Certain of your products or services may sell more frequently during some seasons and less frequently during other times of the year. Special promotions, perhaps advertised by way of email marketing and social media, is just one smart decision that examining sales trends can lead you to make. Another smart decision you might make is to initiate a demand pricing strategy and increase the prices of popular products or services during the time of year that they sell the most.

Get an unfiltered look at what clients prefer to buy on the top line of your P&L, Gross Sales Revenue. While many obsess over the bottom line, because it shows the total revenue earned (or lost) for the month, quarter, or year, the top line should not be ignored. When the top line shows healthy sales, it’s obvious that you’re doing something right. After that, it’s a matter of controlling expenses. Keep an eye on the trends in top line sales data, it is instructive.

Analyze and interpret

Also monitor your expenses, fixed and variable. Fixed (operating) expenses include office rent, W2 payroll wages and utilities. Variable expenses are often sales related, such as marketing and professional development. Increasing expenses may mean that you’ll have to alter some other part of your business (for instance, increasing prices when expenses grow). If certain clients are making late payments , potentially causing you to make late payments to your creditors, consider requiring late or slow payers to make a deposit of at 25% or so on the project you’ll do and/ or increase your project fee for late paying clients.

As you become more proficient in your understanding of financial data and interpretation, you can also calculate and follow certain financial ratios that can provide guidance. On your Balance Sheet you can calculate Net Working Capital, which is your current assets less your current liabilities. This is the amount of money you can use to operate the business day-to-day and invest in growth.

The Current Ratio equals current assets divided by current liabilities. In general, a ratio of one (1) or less indicates that there is not enough available capital to pay your expenses, which is a real problem. If your Debt-to-Equity Ratio (total liabilities divided by total assets) is greater than one (1), it is understood that the business is carrying too much debt—literally at a dollar to dollar ratio. Credit card debt and perhaps also other borrowing as a means to grow your business or pay expenses is bound to cause lending institutions to see your company as a credit risk. Direct your resources to paying down debt.

Bookkeeping software

If you have few transactions in a typical month, you may prefer to record client financial activity in Excel and send invoices in PDF format. If you have several client bills/ month you may prefer to install bookkeeping software. Freelancers and small business owners tend to work with small business specific, cloud, industry specific, or open source software.

Bookkeeping/ accounting software usually fulfills several functions in addition to generating the basic financial statements on a monthly or quarterly basis. You’ll also receive a collection of services that may also include invoicing, inventory management, payroll, financial reports and customer relations management features such as tracking client interactions, sales history and maintaining contact info. To compare features and monthly costs of several software services, click https://www.business.org/finance/accounting/best-bookkeeping-software/

Thanks for reading,

Kim

Image: This photo is from an album Elstner Hilton compiled in Japan between 1914 and 1918.