Why Look At Financial Statements? Part 3

As a business owner you have to make decisions almost daily.  Do you need to order inventory?  Do you need to talk to your employee about their tardiness?  Is your marketing plan working?  Can you pay the bills this month?  Looking at your financial statements can help with a lot of decisions that you have to make, and can actually make those choices less stressful.

Make Decisions About Your Business

It’s hard to confidently make any decision about your business without knowing the financial impact it may have.  Let’s talk about some major and minor decisions you may have to make and how knowing your financial position can make them easier.

Say you’re looking at purchasing a new product line in your store.  It’s a line that is similar to one that you had in the past and you thought did well in your store so you purchase the whole line.  If you had been looking at your financials, including your inventory, you would know that the previous line did not actually do that well.  Due to the price you had to pay for it, you had to sell it at a price that was higher than most of your customers would pay for that type of product.  You had ended up putting most of it on sale and barely made a profit.  It took you almost a year to sell the whole line, lowering your inventory turnover rate.  You may personally have liked the line, but your customers did not.  Purchasing this new line was not a good decision.

You’re summer has been extra busy this year and you are exhausted.  You decide to hire extra help so that you can take some time off.  You hire three new part-time employees to help cover your work so you can take a couple of days off each week.  If you had been keeping track of your financials, including your payroll costs, you would have seen that your overall expenses were already higher this summer than usual.  You payroll costs were high because you were already overstaffed, you had been taking clients to non-necessary meals almost daily, and you had been taking more money out of the business than usual to pay yourself.  By the end of the summer you have barely saved any money and by the middle of winter you cannot pay your bills.  If you had been analyzing your financial statements you would have seen these expense trends earlier and looked for ways to cut costs.  You could decide if all of the meals were necessary, make sure your employees are bringing in enough money to pay their wages, and only take out of the business what you need and can afford.

The final scenario seems small, but can add up to make a big difference.  You’ve been in business a little over 5 years now.  During that time you have tried out many different software apps and computer programs, from $5 for stock photos to $50 for word processing.  Many of these are monthly or annual subscriptions that continue on until you cancel.  You now are paying over $250 monthly and another $450 annually for these, totaling $3,450 per year.  Now you are making decisions about what expenses to cut to help your business in the slow months. If you had been keeping an eye on your financials you would be looking at these expenses monthly and could have cancelled all of the subscriptions that you no longer used and you could have already saved thousands of dollars.  This would have been an easy decision to make earlier and would have kept more profit in the business.

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