Many businesses have some sort of accounting software such as QuickBooks to help manage finances and then provide financial statements such as a balance sheet and income statement to help you gauge the financial performance of your business. Do you find yourself looking at your balance sheet and income statement and not really understanding how this information could be used to help you become more profitable, grow your business, or prevent undue risk? Managing a business requires a deep understanding of financial metrics, as they can provide crucial insights into the health and performance of a company. Business owners and managers should be regularly reviewing and analyzing these documents in order to optimize financial performance.
Your Balance Sheet
A balance sheet is a financial statement that shows a company’s assets, liabilities, and equity at a specific point in time. Assets are resources that a company owns and can use to generate revenue. Liabilities are obligations that a company owes to others, such as loans, taxes, and accounts payable. Equity represents the difference between a company’s assets and liabilities, and it shows the value of the company that is owned by shareholders. There are several ways that a balance sheet could be used to optimize business performance.
Liquidity
The balance sheet can help you assess the liquidity position of your business. Liquidity refers to a company’s ability to meet its short-term financial obligations including vendor payments, payroll, and short-term debt obligations. The current ratio, which is the ratio of current assets to current liabilities, can be used to determine if your business has enough liquid assets to cover its short-term obligations. A current ratio of 2 or higher is generally considered healthy.
Asset Utilization
The company assets are those things that should be used to help generate revenue for the business. The asset turnover ratio measures how efficiently your company is using its assets to generate revenue. The ratio can be calculated by dividing your company’s revenue by its total assets. A higher asset turnover ratio indicates that your company is generating more revenue
with each dollar of assets.
Debt
The debt-to-equity ratio measures the amount of debt your company has compared to its equity. A high debt-to-equity ratio indicates that your company is relying heavily on debt to finance its operations, which can be risky. It is more ideal to have a lower debt-to-equity ratio to ensure your company is financially stable.
Your Income Statement
An income statement, also known as a profit and loss statement, is a financial statement that shows a company’s revenues, expenses, and profits or losses over a specific period of time. Revenues are the income generated by the company, while expenses are the costs incurred to generate the income. The difference between revenues and expenses is the company’s profit and loss. There are three areas that could be analyzed to optimize business performance including revenue trends, expense management, and profit margins.
Revenue Trends
The income statement can help you analyze revenue trends for your business. You should be reviewing revenue for the current timeframe as well as previous years. It is best to compare the current period to the same period in the year prior. If revenue has been decreasing for several consecutive years, it may be time to evaluate your business strategy. Additionally, you
should evaluate the various revenue streams to determine what product or service brings in the most income. Future growth plans should consider those products or services that produce the most revenue, as well as those products or services that are not covering their costs.
Expense Management
The income statement can help you evaluate how well you are managing your company’s expenses. You should be reviewing your expenses to identify any areas where you can reduce costs without negatively impacting your operations. You should also be reviewing your expenses on a regular basis in order to understand exactly how your money is being spent.
Assess Profit Margins
Profit margin is a key financial metric that measures the profitability of a business. It represents the percentage of revenue that remains as profit after all expenses have been deducted. There are a few strategies a business can take to increase profit margin including increasing prices, reducing costs, scaling the business, and focusing on high-margin products or services.
A monthly balance sheet and income statement can offer a business owner a great deal of insight into the business performance. Strategies can be formed to meet company goals based on the information provided on those financial statements. If you find yourself struggling to understand your company’s financial statements or deciding the next step to take in order to meet your business’s financial goals, Aligned CPA, through the Virtual CFO Service, can provide education to empower you when reviewing your financials and advise on the best goals and strategies to make your dreams a
reality.
2024 is quickly approaching, let’s get started today.
Your Success Becomes Our Priority
Through the Fractional CFO services at Aligned CPA, we can help you review all of these factors that will give you Peace of Mind regarding your decision to retain money in your business or pay it out as shareholder distributions.
Making empowered business decisions on accurate financial data can start today.
Cessie Cothran, MBA
Combining the CFO Advisory with tax strategy creates the best opportunity for financial success. We like to call it being perfectly Aligned. Our clients know they have us as a partner, helping them to feel secure about their financial future.