Identifying problem areas on financial reports are critical for all businesses no matter their size. But not everyone is a financial wizard! What do we look for? How do we know if there are problem areas?
The number one way is visiting with your accountant or tax preparer three to four times a year.
Also, here are 3 simple things to look at:
1. Income Statement Analysis
You can compare your gross margin to your competitors. Your gross margin is the cost of goods sold subtracted from your revenue. This will tell you how your cost and pricing is lining up to your competitors. Are you pricing your products to low, therefore not making enough money? Or are you pricing your product to high?
2. Balance Sheet Analysis
The Balance Sheet shows your assets and liabilities. You will see the what your assets are valued at. You will also be able to tell what your liabilities are. This will tell you how your business is financed. If you see that your heavily in debt, you will might want to consider paying off some of the debt. If you see that your balance sheet shows a high accounts receivable compared to your sales. You might want to consider not making so many sales on account, unless you really want to be a banker!
3. Cash Flow Analysis
This report will show you how your cash flows in and out of your company. If you compare you net income to the cash flow, you can get an idea of how effictive you are turning accounting income into real cash flow. If this is a problem, you might want to focus on understanding why and how your cash flow is behind your net income. If you inventory is increasing, you should consider downsizing your inventory to keep it on a more manageable level. That should create more of a cash flow for your company. If you have problems understanding this report, it is always a good idea to visit with your accountant. They would be able to explain and help you understand where problem areas are.
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