7 Tips for Reading Financial Reports

Financial Reports can be confusing at times, however, they are critical to understanding your business.  We would like to share some easy tips to help you see the forest through the trees!  The benefits of reading and understanding your financial reports are many, including reducing your tax liabilities, monitoring internal controls, catching coding discrepancies, and job costing.

7 Tips for Reading Financial Reports

1)    Know What You are Looking at

The basic financial statements are the income statement (sometimes called profit and loss statement) and the balance sheet.  The income statement lists all of the revenues and expenses of the business for a specific period of time.  The balance sheet shows all of the assets, liabilities and equity of a business as of a specific date.  While the income statement shows how the business has preformed for a particular period the balance sheet reflects the true health of the business as sometimes current period performance can be misleading.

2)    Liquidity Matters

Compare the balances of cash and accounts receivables to accounts payable, if cash and accounts receivable are greater than accounts payable your liquidity position is good, if they are not your liquidity position is bad.  When your accounts payable are greater than your cash and accounts receivable your cash flow may be tight in the near term because you will need to pay out more monies than you will be bringing in.  By watching this ratio you can proactively manage spending to avoid shortages.

3)    Know Your Margin

The gross profit percentage of a business is one of the most important things to monitor.  Gross profit is equal to gross sales minus cost of goods sold.  The gross profit percentage, also called profit margin is the gross profit divided by the gross sales.   Most businesses know what their profit margin should be so it is usually somewhat easy to use monitor decreases or increases so the business can manage costs and pricing.

4)    They are Only Relevant if They are Accurate

You need to be certain that your financial records are complete and accurate, obviously if they are not you are probably wasting your time if you use them for analysis and decision making purposes.

5)      Significant Changes in Month to Month Reporting

 Keeping an eye open to significant changes in numbers or trends anywhere on the financial statements, these significant changes need to be explained because they could indicate significant problems or opportunities.  This could be associated to an error in reporting, fraud or hopefully a large increase in profit margin.

6)    Supporting Schedules Matter Too

It is important to look at a few of the schedules that support your financial statements to monitor important aspects of your business on a regular basis.  Reviewing the accounts receivable and accounts payable aging summaries is particularly important as it allows you to see if your customers are behind on their payments and if you are behind on your payments to your vendors.

7)       Financial Reports Have Limits

 Remember when you read these reports they do not tell the whole story.  At times, estimates are made in certain categories as hard numbers are not available.  Look at the business as a whole with the financial reports being one part of the equation.

  Financial reports become clearer every time you make the effort to read them.  They are an important part of your business and having a working knowledge of understanding them is critical.  We look at, revise, read and advise with them everyday.  If you would need some help we would be happy to meet with you to discuss our opportunities.