Accounting and financial figures can provide you with the information you need to gauge the health of your business, and where it is heading. Good sales and happy customers are not necessarily indicators of a healthy business. If you’re unfamiliar with balance sheets, profit and loss and cash flow statements, you may think they are nothing more than pages with numbers. They are actually valuable tools that can provide the information necessary to make good decisions regarding sales, expenses and profit.
Let’s start with the balance sheet. Think of it as a snapshot of your business at a given point in time. The amount of capital distributed over the various accounts in the business and the surplus of assets over liabilities shows profitability. If it shows that liabilities are greater than assets, a loss position for the company is indicated. Even more important are trends over time. A string of losing months may create a negative cash position that must be addressed. You can also spot trends on an item-by-item basis that can lead to decisions regarding inventory purchases, receivables management and capital investment.
Profit and loss statements are another valuable tool to determine how well the company is operating for a given period of time. It will answer questions such as the wisdom of price-cut strategies, the benefits of high sales or advertising expenses and the trend in overhead costs.
The flow and use of money in your business is critical. The continued success of the business depends on your ability to make sound financial decisions.
Source: SCORE, "Counselors to America's Small Business"