Financial Statements – Why They Matter

In fast growing businesses, financial records are commonly thought of as a compliance requirement, either to file taxes or because a lender demands them.

For a number of business owners and management teams, financial statements are reviewed infrequently. Entrepreneur complaints about financial statements, such as “they aren’t accurate” or “they don’t tell me anything about my business”, are frequent. While understandable, this is a big lost opportunity. Reliable, regularly reviewed financial reporting is a key component of business success.

Implications

Financial Statements have a number of key implications, both internally and externally.

• Visibility into Changes in the Business – While data from many sources is recommended to make decisions within a business, financial statements can reveal a great deal about performance. By comparing items in the financials relative to each other at a quick glance, areas for further investigation will become apparent. Perhaps profitability is increasing, but cash is decreasing. Are customers taking longer to pay, hence a buildup in Accounts Receivable? Or is something else going on? Maybe there is a buildup in inventory getting ready for a busy season, or a recent large purchase of equipment to fuel growth. The answers could be no further than in the monthly financials.

• Tracking Performance to Plan – Most companies, whether they have a formal one or not, understand importance of budgeting. Monthly financial statements provide an opportunity to track performance against that budget, and make decisions where needed due to deviations from the plan laid out.

• Taxes – While unpleasant, taxes are a constant in business. Financial statements, and the underlying numbers in them, form the basis from which tax returns are filed. Providing financial statements during the year to your tax accountant can allow you to plan during the year. Perhaps it makes sense to invest in additional equipment before the end of the year. Perhaps based on company performance, your tax bill will be higher than expected. Getting out in front of these possibilities can save a lot of anguish down the road.

• Outside Capital – Whether a bank, investor or even a potential buyer, one of the first things an external party will ask for is financial statements, and multiple years at that. Poorly prepared financial statements make it quite easy to argue for a lower value in the company, and hence less capital to the business. Even if these avenues are down the road, start managing to those expectations.

Keys to Success

• Accuracy – Inaccurate financials are problematic. However, don’t let historical inaccuracy of financial statements diminish their future value. If financials aren’t accurate, take reasonable efforts to improve them. Even some basic systems and processes can have a massive impact.

• Proper Formatting – Financial statements are a management tool. If the layout or presentation limits their utility, then make changes accordingly. It may make sense to break out certain line items instead of reflecting them in summary. Ensure the right accounts are above and below gross margin. It may make sense to break out business lines in the financial statements as well. Lastly, financial statements are a snapshot in time. It often makes sense to review them relative to past trends.

• Regular Review – Financial statements should be reviewed monthly, with a more in-depth review quarterly and especially at year end. Maybe little has changed and the business continues to perform as expected. However, done right, a regular review should be relatively quick and high impact.

• Financial Statements – Don’t just review the P&L. There are multiple financial statements for a reason and they all are interrelated:
— P&L – indicates revenue, margins, spending and the “bottom line”
— Balance Sheet – what you own and what you owe
— Cash Flow Statement – indicates where cash was used and generated.

If a patient goes to the doctor to get a physical, are they likely to want the results, or just walk away with a feeling they are healthy? Every business needs regular, accurate financial statement reporting – it is the monthly physical for your business and a key to its long term health.