Do you remember CliffsNotes from college? I find myself wishing I still had CliffsNotes, especially when I’m reading lengthy business books with way too much fluff. You probably feel the same way when you get a management report every month. The financial statements can be overwhelming, especially if you don’t know what you’re looking for.

I know from watching clients glaze over, that it’s important to hit the high points and move on. I try to at least be self-aware of when I’m putting people to sleep!

While reviewing your performance is crucial, I don’t think it’s helpful to spend a ton of time dwelling on details that happened in the past. I’d rather you hit the high points and then move on to the juicy, fun stuff - planning for the next few months’ strategy.

Here are the highlights to look for when you’re reading your financial statements:

Income Statement: Start with gross revenues. Did you hit your goal? 

Looking at this report in the common-size version will allow you to see every line item as a percentage of revenues. This way you’ll be able to quickly check out your gross margin and profit margin. You should have targets for these two numbers every month to compare to. You’ll also be able to see any expenses that may be too high very quickly. 

You should also compare your income statement to the prior period. If anything is significantly different, you should know why. This is a quick way to find out if something is misclassified or otherwise missing or incorrect.

Balance Sheet: How much cash do you have on hand? Is it enough to get you through the next quarter? Do you have enough for any tax obligations or major investments coming up? 

Next, if you’ve got a balance in Accounts Receivable, check your aging report and make sure you don’t need to make any follow-up calls to collect anything that’s not current. 

From there, move down and take a look at accounts payable and any long-term debt. Make sure they look reasonable and you’ve got enough cash to cover your upcoming payments. Are you paying down debt as fast as you’d like?

Lastly, take a look at owner distributions for the year to date. Do they seem reasonable? Are you able to take as much out of the company as you’d like?

Statement of Cash Flows: This is arguably the most important financial statement to look at. The statement of cash flows highlights the difference between what happened in your income statement and what actually happened in your bank account. 

If you’re running a profit, but short on cash a few things might be happening. You might have too much sitting in receivables, your debt payments may be too high, or you’re taking too much out in owner distributions. Investigate what the issue is and make changes to fix it ASAP. After all, cash is king.

While it can be overwhelming, reviewing your financial statements is essential for future strategic planning and making the best decisions possible for your business.

 If you’d like help understanding where your business stands or how to improve performance, book a discovery call!