Financial Statements are a collection of reports that provide information on your businesses health. It is very important that you review your financial statements on a yearly basis as they can help provide you with a firsthand look at how your business is performing. A good time to review and analyze your statements and check the health of your business is during tax reporting season.
Viewing and understanding your statements can help you plan for the next year and help you make any necessary adjustments to improve your business’ performance.
Three important statements for your small business!
- Balance sheet: a statement of the assets, liabilities, and capital of a business or other organization at a particular point in time, detailing the balance of income and expenditure over the preceding period.
- Income statement: measures a company’s financial performance over a specific accounting period. Financial performance is assessed by giving a summary of how the business incurs its revenues and expenses through both operating and non-operating activities.
- Cash flow statement: shows how changes in your balancesheet accounts and income affect cash and cash equivalents, and breaks the analysis down to operating, investing and financing activities.
Let’s look closer at the income statement and the insight it can provide:
In the example below, we see that total sales equal 100% of income, and that each expense item is a percentage of that income. When looking at the ratios (a ratio is the percentage of income that has been used to pay particular business expenses) in the right column we can see that each expense indicates the percentage of monies used to pay that expense. If we compare year over year we can review and analyze to see if our expenses are increasing, decreasing or maintaining ratios. This is a great way to keep track of where money is being spent.
To illustrate this, if we see a rise in our COGS (cost of goods sold), then we can address this by negotiating better pricing from suppliers, source new suppliers, or possibly look at raising our sale price to cover the cost increase.
Ratio analysis can be complicated but is a great way to give your business a quick check-up. Ask a small business consultant or your accountant or bookkeeper for further information
The Halton Region Small Business Centre offers a financial basics course during the year. One of the goals of the Centre is to empower small and medium-sized enterprises and give you the tools to achieve success. For more information about resources, services, business events and seminars, contact us by dialing 311, 1-866-442-5866, online at haltonsmallbusiness.ca, by email at firstname.lastname@example.org or visit us at 1151 Bronte Road, Oakville.