To be successful in business, you need to keep an eye on your financials. Financials – which offer an overview of your revenue and your expenses — are important because they are the scorecard that lets you know how your business is doing.
Even if your business is growing, it doesn’t help if your expenses are growing even faster. When that happens, you’re heading for bankruptcy. Bankruptcy is a legal proceeding where you can declare your inability to pay your debts. It’s the equivalent of a heart attack for the business. Just as there are often warning signs before a heart attack, there are also signs that your company’s finances aren’t where they should be and that bankruptcy may be looming on the horizon.
3 Financial Statements All Companies Should Know
First, let’s look at the three biggest financial tools a business owner can use. They include:
- A balance sheet
- Profit and loss
- Cash flow sheet
The balance sheet reports your company’s assets, liabilities, and shareholder equity. At a given point in time, it offers a snapshot of what your company owes and is owed. It’s an important marker of what your company is worth (or book value).
The profit and loss statement (or income statement) is look at a business’s revenue, costs, and expenses. You may also see it referred to as an income statement or earnings statement.
The cash-flow sheet (or statement) records all the cash received from operations and investment sources, as well as the cash used to pay for business activities and investments during a given time frame. The cash-flow statement gives insight into a company’s operations, investments, and financing.
These three financial statements are issued on a quarterly and annual basis by all publicly held companies. When you meet with ActionCOACH Tampa Bay, we can give you detailed and real-world insight into how each of these tools works and can be applied to your business.
For now, there are two more financial indicators that we use to assess a company’s health: cash gap and margin percentage.
Cash Gap
More and more sales are great. However, did you know that you could be increasing sales every month and still go out of business? This can be caused by what’s known as a cash gap.
The cash gap means that you have become the bank for your customers. However, when you have more expenses than incoming cash flow, that creates a problem. Take a look at the picture below.
By day 30 on the chart, you need to have paid for your inventory, or stock. However, you may have to wait until day 120 to receive income from the sale of those goods. This is your cash gap.
At ActionCOACH Tampa Bay, we have seen several businesses in this situation. More importantly, we’ve been able to help them make a course correction. We’ll identify areas where you can boost your cash flow.
Margin Percentage
Another financial area that can show signs of problems is margin percentage. A certified public accountant (CPA) that looks at margin percentage may find a profit drag. In this situation, the overall margins are positive and overall profits were positive. However, there may be one solution or service that, when sold, leaves you in the red.
Look at the big picture of your profits, and you may never see it. But examine the numbers more closely, and you’ll see where your profits are being eaten away. That is the power of focus and the power of using your financials correctly.
We can show you how to calculate your margin percentage and find the areas that are bringing down your profits.
Improve Your Financial Outlook with ActionCOACH Tampa Bay
It always helps to work with an advisor or a business coach to get assistance in complicated areas like finance. Unfortunately, most CPAs and bookkeepers are focused on having the numbers make sense from a tax credit and filing perspective, not necessarily finding the issues and opportunities in your business.
However, when you understand the significance of your three main financials — balance sheet, profit and loss, and cash flow — and they are up to date, you’ll know what to look for, and you can identify areas for improvement.
Contact ActionCOACH Tampa Bay and let’s discuss any questions you have about the financial health of your business. We’ll look at the way your numbers are trending — including those beyond what we’ve covered in this article. Work with us, and you’ll gain the knowledge you need to take control of your business.
Written by Tony Tona, Business & Executive Coach, ActionCOACH Tampa Bay