Why Look At Financial Statements? Part 1

A lot of clients come to me because they want their finances in order for taxes.  They don’t look at their financial statements on a regular basis, and sometimes never at all.  They want to make sure they’re getting all of the deductions for taxes and need to have everything organized so their accountant can work their magic.  Taxes are an important part of being a business owner, but should not be the number one reason why you get your finances in order.  I want to go over some of the key reasons why you should be looking at and analyzing your financial statements on at least a monthly basis.

See How Much Money Your Business Is Making

How do you know how much money your business is actually making if you don’t look at any financial statements?  A lot of people just look at the money that comes in the door (the amount customers and clients are paying them) and measure their success on that.  How much money comes through your door (your revenue) is very important, but does not give you the full picture.

For example, a business gets paid $10,000, $12,000, $15,000, $16,000, $17,000, and $16,000 from customers in six consecutive months.  So if you just look at revenue it looks like business is growing and doing well.  Now lets add in expenses for those six months of $6,000, $8,000, $10,000, $12,000, $13,000, and $14,000.  That brings their net income (revenue minus expenses) to $4,000, $4,000, $5,000, $4,000, $4,000, and $2,000.  That tells a different story about the business’ profitability.

Now that there’s a clearer picture the business owner can look at why expenses are going up at a higher rate than money is coming in the door.  For most businesses, the net income, or bottom line, is directly correlated to what they pay themselves, so this is very important number.  This number is also the number that taxes will be used to compute taxes.  This can help plan for the future and help you determine the amount of money that needs to be set aside to pay taxes quarterly or annually.

Another way that some business owners measure how much money their business is making is how much money is in the bank.  Again, that is an important thing to know, but does not tell you how your business is doing.  The money in the bank may include items like funds contributed by the owners, loan proceeds, or money that will have to be paid for taxes.  Just because your bank balance is higher than last month does not mean that your business did better.  You may have outstanding checks have not been cashed or money that customers gave you for deposits on jobs in the future. 

By looking your reports each month you can not only see how much your business is making, you can also see what you owe.  This will help with cash flow and planning for the future.

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