Getting the Most out of Your Monthly Financial Statements: A Beginner’s Guide
Introduction
Your monthly financial statement is like kale: you know it’s good for you but it’s awfully hard to digest. However, understanding and thoroughly digesting your company’s financial statements is crucial for maximizing the benefits they provide. In this beginner’s guide, we will explore three easy-to-swallow ways to use your financial statements and improve your business.
1. Introduce Finance to Operations
- Top-line sales alone may not give you the full picture of your business’s performance.
- Create operational ratios by introducing an operational metric and dividing it into your sales figure.
- Ratios like "Sales per Employee" or "Sales per Man Hour" help measure efficiency and provide a basis for comparison.
2. Mix and Match
- Use ratios to compare numbers from the balance sheet and income statement.
- Calculate "Days of Inventory on Hand" and other important ratios to gain insights into inventory management and cash flow.
- Understand terms like "Days Sales Outstanding" and "Days Payables Outstanding" to improve your cash cycle.
3. Look Forward by Working Backwards on Your Financial Statements
- Financial statements describe past performance but can also prescribe future changes.
- Use your data to determine optimal pricing strategies based on labor costs and overhead.
- By analyzing last month’s numbers, you can make informed decisions on pricing for the future.
Tracking and Comparing Trends
- Make analyzing financial statements a monthly habit to track trends over time.
- Compare your ratios to those of more successful companies to set benchmarks and goals for improvement.
- Regularly monitoring and comparing your financial data will help you understand the true financial health of your business.
In conclusion, incorporating these strategies into your financial statement analysis will not only enhance your understanding of your business’s financial health but also provide actionable insights for sustainable growth and success. Make digesting your financial statements a priority and watch your business thrive.
