All small businesses differ slightly in their operations, environment, and methodology — making it challenging to measure business performance from a single, universal approach. What many entrepreneurs don’t realize, however, is that they can use financial statements for much more than supporting documents on loan applications and tax returns. Regular preparation and analysis of financial statements can provide small business owners with the basic tools for determining how well their operations are currently performing, help them detect/correct problems and leverage opportunities, all leading to increased profits. In this article, we will discuss the importance of financial statement analysis for small business owners, the different types of financial statements, and how to effectively use financial data to make well-informed decisions. The Importance of Financial Statements for Small Business Owners Smart small business managers and owners rely heavily on the figures and conclusions drawn from their financial statements. Without preparing and analyzing your financial statements on a regular basis, you are basing many of your decisions on guesswork or vague perceptions of how your business is doing. It is standard practice to prepare financial statements monthly. With this information, you can begin to determine the financial health of your business (cash flow, product line profitability, gross margins, liquidity), identify current or potential problem areas and identify successes. With this information you can take measures to improve your business, from making additional investments to supporting promising products to eliminating unprofitable lines of business. Financial statements also allow you to see where your business is in danger. Just because your small business’ sales are increasing doesn’t necessarily mean the business is financially stable and it doesn’t guarantee continued success. Some of the chief causes of small business failure, including high operating expenses, poor cash management, excessive working capital investments and inventory mismanagement, could all be identified/mitigated by reviewing and understanding your financial data early-on and using the information to make course corrections. By reviewing comparative data across periods, for example, it is possible to identify where spending has gotten out of control. On the other hand, these reports can also help you spot buyer trends and see where you make the most money, allowing you to focus more fully upon those areas that drive increased profitability. Four Types of Financial Statements There are four basic types of financial statements. You’ll want to make certain that you utilize all of them in order to get the most out of your financial reporting. Below are the four types of statements:
Let’s take a look at what these financial statements can be used for and how they can help you in running your small business. Income Statements An income statement, sometimes called “a statement of income and expense” or “a profit and loss statement (P&L),” is a summary of income or loss for the period. A typical income statement would be structured as follows:
It is important to understand that the income statement shows results for a period of time (a year, a month, a quarter) and that it “starts over” every period. By comparing the income statements for the past several years or periods (if comparing month-to-month), you can see trends and anomalies. These observations can then be studied further to understand the cause and determine if there is some action that could be taken to improve the business. Balance Sheet A balance sheet shows all of your company’s assets and liabilities, along with its net worth. It might also be called a statement of financial position. The balance sheet is a snapshot in time. It illustrates balances at a moment in time (i.e. at month-end or year-end). Unlike the income statement, which shows results of a period of time (i.e. a year, a month, a quarter), information from the balance sheet is used to estimate the liquidity, funding and debt position of an entity, and is the basis for a number of liquidity ratios. Your balance sheet relies on the following equations:
Balance sheets typically classify assets as current assets (those that can be converted to cash within a year) or non-current assets (long-term investments, equipment and other fixed assets, and other assets (such as intangible assets). The same current versus non-current classification is performed with respect to liabilities. The equity section of the balance sheet shows the company’s “net worth” (assets less liabilities). This should not be confused with a company’s economic worth or value. Often assets and liabilities have different market values than those recorded on the balance sheet. Most assets and liabilities on the balance sheet are stated at cost (what you paid for them, rather than what they are “worth”). The balance sheet is often used to determination the financial stability of a company. From this statement one can understand how leveraged a company is, what resources it has to pay its bills and its general financial health. Statement of changes in Equity This statement rolls forward the entity equity for the period. It takes the equity at the beginning of the period and either adds or subtracts from it, depending on the company’s net income or loss, as well as accounting for things like dividends or distributions to shareholders. Statement of Cash FlowThe statement of cash flow shows where your cash is coming from and where it is going over the course of a period of time. Like the income statement, this statement shows activities for a period of time versus a point in time. This statement starts with your beginning cash and shows the cash used or generated from various activities. These activities are split into three categories – operating, investing and financing activities. Operating activities represent cash generated from or used for things such as buying inventory, selling your goods or services and paying employees. Investing activities represent cash generated from or used for things such as buying or selling equipment, buildings or land. Financing activities represent cash generated or used in activities such as selling or redeeming stock or issuing or paying debt. This statement is crucial in trying to understand where cash is coming from and where it is going. Many say “cash is king” and this statement tells how a company makes its cash and how it spends its cash. In some instances a company can make certain decisions to manipulate its balance sheet or income statement; however, one cannot fake its cash flow. How You Can Use Financial Statements as Management Tools You can use financial statements when making a number of different decisions. For example, you can see what investments your company has made and what kinds of returns you are receiving on those investments. If you added another $10,000 to your marketing budget, did you see an increase in sales? If you cut your operating costs by 10%, how much of an effect does that have on your bottom line? Financial statements can help answer these questions. Financial statements are also useful for highlighting the natural rhythm of your business. Every industry has high and low points throughout the year. If you sell toys, for example, you’ll likely see a high period of sales between mid-October and January in accordance with the holiday season. If you sell clothing, you’ll note an increase in the sale of swimsuits, shorts, and other summer gear starting around May. Using your financial reports to see these natural high points can help you determine when you need to increase your stock or expand your advertising efforts or when you may need to borrow money. Owners and managers can use financial statements to ask and answer important questions about their businesses. Is a company generating a strong investment return? All you need to do is look at your operating income and divide it by the business’ invested capital (working capital + fixed capital) to determine what return you are earning. How much capital are you tying up in working capital as a % of sales? How leveraged is your company? How is a product line doing? How long does it take you to collect receivables? These are all important questions that can be answered by having and using timely and accurate financial statements coupled with analysis. Using these Financial Reports Together Individually, these four financial statements can tell you some information, but it’s when they’re used together that they really give you the information you need to make the best decisions. It is important to understand each statement. Each tells you something important that you might not get from focusing only on one or two of them.
Many times small and mid-sized business owners are experts in a product, sales or manufacturing and do not have the financial skills or the time to properly focus on the company’s financial matters. In these instances, you may want to bring in an outside consultant or a fractional CFO. These part-time financial experts can help small and mid-sized businesses make smarter business decisions, without the expense of hiring someone full time. Insightful business and financial analysis will lead to a stronger more profitable business. Contact Lauber Business Partners today to learn more about these options.
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Managing cash flow is the core of sound financial planning and a critical component to any company’s success. Positive cash flow, or when a company’s incoming revenues outweigh its expenses, can ultimately determine the success or failure of your business. For every businesses, managing cash flow is essential to survival. If a business cannot make their required payments to lenders, vendors and employees, their business will fail. But the cash flow heartaches of many small business owners are often just a result of poor cash and financial management. The good news: cash management does not have to be complicated, and we’re here to help you simplify it. In this post, we’ll provide some simple and practical tips for stabilizing cash flow and achieving financial security in your company. Read on and we’ll show you how. Stagger PaymentsWhile in some ways it may seem counterintuitive to stagger payments, it is important to not pay everything at once. When reviewing bills, cutting and mailing all expense checks together can destroy your cash flow. Always be prepared for surprises when calculating payment plans. Stagger your payments in case of a surprise, and collect data to create a corporate, cash flow plan. Cash flow planning strategies are crucial to ensure you do not end up with a “zero” balance. A helpful strategy for staggering payment is to setup three tiers for issuing checks:
These simple groupings will help prioritize and manage your payments in a sustainable, cash flow-friendly manner. Pay With Current Cash, Not Expected CashFinancial advisors often recommend responsible credit card usage – “don’t make purchases with cards if you don’t have the money to pay them off.” The same holds true in business — do not make payments based on promised cash receipts from customers. Doing this will ultimately lead to overdrafts or bounced checks. Don’t Use Sales or Payroll Tax Money To Float Your OperationsWhile it may be tempting to buffer expenses with sales or payroll tax dollars, the reality is this practice could cost you more in potential penalties, fees, interest and time than simply securing short-term financing. Evaluate financing for your company and plan to deposit, rather than spend, sales or payroll tax money. A Payroll Service Is Worth The InvestmentPayroll is one of the most significant cash flow elements for small businesses. While outsourcing payroll tasks may seem unnecessary for a small company, it can streamline a normally daunting task, minimize liability concerns, and manage the collection and payment of payroll taxes. Find the Right Bank and Maintain a Positive Relationship with your BankerNot every bank is the same. Different banks prefer different types of clients. Their preference might be certain business sizes, industries or geographies. When times get tough banks have the tendency to pare back their clients to fit their desired target, often with little notice. Finding the right bank up front is crucial. As a small businessperson, it is immensely important to maintain the relationship with your banker. Ensuring lines of communication remain open is vital to your financial stability. If you anticipate fees or a bounced check, contact your banker and discuss the circumstances. A proactive and honest approach can go a long way, and by understanding the situation, experienced bankers can provide helpful insight and strategies. Banks do not like surprises and it is best to deliver bad news before they stumble across it on their own. ConclusionWhile cash flow will likely continue to present challenges to many entrepreneurs, companies can find relief through some simple, practical strategies and best practice such as those outlined above. A little communication and planning can go a long way in improving your cash flow. Let Lauber Business Partners Lead The WayLauber Business Partners is a trusted, well-equipped advisor to small and mid-sized businesses. Contact us today to learn more about our team and discuss what we can do for you and your bottom line.
An organization’s financial management plays a critical role in its bottom-line success. For small businesses, entrepreneurs, and startups especially, revenue and expense fluctuations are typical and can add to the burden of managing finances successfully. It’s hard to find great advice on managing your finances; the world is full of articles, videos, books, advisers, and consultants, each with their own biases and opinions on what to do. In this article, we will instead focus on a couple of the basic principles of financial management and the tried-and-true strategies for navigating them effectively. Financial management is all about moving, controlling, and evaluating cash flows across a business’s operational cycle: producing a product or service, making a sale to a customer, collecting the money and starting the process all over again. Managing finances centers around multiple aspects: purchasing raw materials, turnover ratios of raw materials and finished goods inventories, collection of accounts receivable from customers, paying bills, suppliers, and employees and establishing appropriate credit facilities to buffer business fluctuations. When making management decisions, business owners and managers must consider how fluctuations in these internal/external operational facets will impact their profit margins, cash flow, and overall financial performance. Ultimately, learning proper financial management strategies is vital for a business’s success. Bookkeeping and Accounting John Nessel, President of the Restaurant Resource Group, says, “If you can’t count your money, you can’t manage it.” Businesses cannot operate without money; Nessel argues that those who can’t control their cash flows and profits ultimately cannot control their business. While the complexity of a bookkeeping system and the number of transactions can vary between small and large businesses, the function of this process is consistent. Businesses have to record daily transactions, produce invoices, process payroll, and maintain/balance subsidiary ledgers, general ledgers, and historical accounts. Continuously, accurate bookkeeping helps businesses keep track of their profits and losses and generates information to project future outcomes. Accounting, on the other hand, is distinguished from bookkeeping as a higher-level, subjective system that measures, identifies, records, and communicates compiled financial information. Comprised of preparing adjusting entries and company financial statements, analyzing costs of operations, completing income tax returns, and aiding the business owner in understanding the impact of financing decisions. A strong accounting process helps build a big-picture understanding of profitability and cash flow awareness. The intertwining functions of accounting and bookkeeping processes are vital to a business’s long and short-term financial sustainability. Accounts Payable (AP) and Accounts Receivable (AR) “It takes money to make money.” Regardless of the size/type of your business, you are most likely paying someone for something to keep your business running. Altogether, these unpaid costs to outside vendors for goods and services, comprise its accounts payable. Accounts receivable, contrarily, are assets; the money that a business has a right to collect for selling products or services on credit to a customer. How do the terms apply to financial management? AP/purchasing records provide an organization with information about accounts with suppliers, be it outstanding invoices, costs-of-purchases, or details on how the organization made payments/purchases. This information can be used to evaluate vendors, seek better pricing, cost out products or project future cash outflows. AR systems, on the other hand, can help a business produce payment reminder letters and recover past due accounts before they become bad debt as well as help forecast future cash inflows. Investment Opportunities As a business matures, frequently more cash is necessary to finance its growth. We’ve discussed the role of strong financial management in tracking and managing cash flows, making future projections, and budgeting for business needs. However, the financial management system is also instrumental in helping to identify and evaluate investment opportunities that can complement or enhance the organization’s current condition. Ultimately, by carefully considering information from its financial management system along with market conditions and needs while exercising sound business judgments, a business can confidently determine if they’ll reap the benefits of investing in a new project. Understand Risk & Educate YourselfAnother primary objective of the financial management system is to provide information to help management develop strategies to mitigate risk. There are two main types of risk: business risk and market risk. Business risk is the potential that an individual company will do poorly or fail. Business risk can be managed through diversification, the strategic process of allocating capital to reduce a business’s exposure to any one particular asset, market, customer or risk. Good financial management can help minimize business risk by identifying cost problems, customer issues, unprofitable products, liquidity issues and the like. Unfortunately, market risk is inherent to the market as a whole. However, even though one cannot control the market, there are actions that can be taken to mitigate market risk. With proper financial management and analysis, market trends can be identified and corrective actions can be taken. This might involve reducing costs, changing market segment strategies or enhancing a company’s credit facilities. The bottom line is that there are always risks involved in business. However, with proper financial and business management, risks can be managed. Need help? Ask Those With Experience For many, the most challenging step in financial management is knowing where to start. For others, it’s merely maintaining the course. Small business owners’ financial decisions will impact the entire company and the people that are part of it; so it’s important to have the proper financial management systems in place to provide information to inform management when making key strategic and operating decisions. Lauber Business Partners can help guide you through every step of the process and ensure that the financial decisions you’re making are best for both your business’s present and its future.
Fractional CFO Provide Cost-effective Access To A Key Leadership ResourcesIt goes without saying that business leaders and entrepreneurs have certain talents and skills necessary to manage a successful business. However, those at the reigns of a company are not always multifaceted business experts, requiring effective leaders to create senior management teams. Among those leaders who oversee a company’s most critical functions, the chief financial officer (CFO) is especially important. CFOs are proven leaders with extensive experience in the financial and strategic aspects of business. But while the CFO occupies a critical role in the leadership team, not all companies have the resources or budget to hire a full-time CFO. Fortunately, there are fractional CFOs – chief financial officers who serve on a contract basis in a part-time capacity and provide a company with strategic financial support. In this post, we’ll discuss the value of fractional CFOs and cover the key considerations when evaluating a fractional CFO for your organization. Why Do Business Owners Neglect Hiring A CFO?One reason companies fail to hire a CFO role is that they simply “don’t know what they don’t know.” Other reasons might be that they don’t believe they can afford a CFO. What business owners often don’t realize is that a good CFO brings great value, normally greater than their cost, to an organization. Is there really a financial impact to not hiring a CFO?The short answer is, “yes.” A CFO provides direction, leadership and expertise in financial matters. Organizations that lack a CFO may be mispricing their products or services, improperly managing inventories, not managing contractual risk or overlooking key revenue and cost savings opportunities. These are well known CFO responsibilities but what some do not realize is that good CFOs also act as a sounding board and source of alternative ideas for the leader of the company. They challenge decision making and explore alternative business strategies to ensure the business takes the best course forward. Is There A Magic Number Or Key Metric That Signals The Need For A CFO?The need for a CFO depends less on spreadsheet numbers and more on the company’s strategic plan and long-term goals. Corporations experiencing growth, facing financial challenges, considering expansion, or unsure of how to capitalize on success or where to direct momentum would be well-served by a CFO. An experienced CFO can provide big-picture perspectives and evaluate the needs and opportunities of a company within the context of the broader business environment. Why Can’t An Accounting Firm Adviser Do The Job?When companies examine their organizational charts, many draw comparisons between CFOs and an accounting firm advisors. While accounting firms can play an essential role, they do not serve the same purpose, nor equate CFO value. Their functions are not interchangeable because accountants are often in the business of looking back – they are focused on data from previous years while preparing audits or tax returns. A proactive approach and forward-thinking, strategic mentality are primary attributes of effective CFOs. While accounting firms play an important and necessary function, a fractional CFO is imbedded in the business, seeking to understand the day-to-day operations of the business and its strategic opportunities. They are truly a member of the company’s leadership team. Benefits Of A Fractional CFOWhile the role of a Fractional CFO varies from company to company, here are the common benefits of having a Fractional CFO:
The Bottom LineSimply put, CFOs are good for business. Entrusting an experienced leader to manage the growth and fiscal health of a company can ensure its profitability and help weather financial storms. O.k., I’m Sold…But How Do I Afford A CFO?While the benefits of the CFO role are clear, budgetary realities prevent many organizations from bringing on someone full-time. The good news is that even companies that cannot afford a CFO’s salary can still enjoy the position’s benefits. Fractional CFOs offers cost-effective, scalable solution that provide companies with limited budgets access to strategic financial support. Contact Lauber Business Partners today to discuss fractional CFO options for your business and learn more about the potential benefits to your bottom line.
Human resource departments can have a dramatic impact on strategic planning, productivity, administrative cohesion, employee engagement, and various other aspects of running a business. Indeed, a strong HR department can help your business establish a productive and profitable company culture. So the question is: What makes an effective HR department? |