One of the responsibilities of a business owner is to understand his business financials. You can gain control over your financial story by being the author of your financial narrative. You can do so much more if you have a comprehensive knowledge of your business. You can direct your staff to better manage your book and on how you wish to have your taxes done to meet your objectives.
Your bookkeeper is your scribe and your accountant is your editor but you are responsible for the financial story of your business.
In order for any business owner to be successful, they need to be able to understand and make decisions from the three critical (or core) financial reports. The core financial reports are:
• The Income Statement (Profit & Loss)
• The Balance Sheet
• The Cash Flow Statement
The Income statement (Profit & Loss) – This is your business efficiency document. It tells you how efficiently your business is transforming revenue to profit.
What are the different parts of an income statement?
1. Revenue – It is the normal operating business money coming into your business. It comes from things like sales, billings, etc.
2. Cost of Goods Sold – Is a direct cost or variable cost, meaning it changes as the amount of sales change. It includes product manufacturing.
3. Gross Profit -Is also referred to as Variable Margin or Variable Profit – It is equal Revenue minus Cost of Goods Sold
Balance Sheet – Is the status where your business is at a specific point of time. It is your scoreboard.
Cash Flow Statement – It basically shows where cash went between the balance sheet and the income statement.
Five common mistakes to avoid in looking at financial statements:
1. Not looking at your financial statement on a regular basis – Get into the habit of looking at your financial statement on a regular basis
2. Not understanding the difference between cash flow and profit – Know that Profit is not cash.
3. Not knowing what to look for in each financial report – Know what to look for in each report and interpret it correctly.
4. Using automatic import functions in the accounting software and blindly accepting the classing and accounting placement decisions – Ensure accurate data importation in QuickBooks.
5. Confusing a non-standard naming in your Chart of Accounts – Ensure the information is able to be interpreted effectively.
By John Hester