Does reading your financial statements feel like trying to interpret a foreign language? If so, you’re not alone. In fact, many small to medium-sized business owners find financial reports overwhelming. Thankfully, how to read financial reports can be learned, and once you understand them, their numbers become your best tools for making decisions.
At Compass CPA, we help business owners decode those numbers and reveal the story behind them. In this post, we’ll identify your most important reports; where to focus your attention on them; and how to use that information to grow your business.
1. Read the ‘Big Three’
Become comfortable and familiar with your three most important financial statements.
- Income Statement (also referred to as the Profit and Loss Statement): This shows your income, expenses, and whether your business made a profit during a specific period. Think of this as a report card on your business activities.
- Balance Sheet: This shows what your business owns (assets), what it owes (liabilities), and what’s left over (equity). It’s kind of like a health check-up.
- Cash Flow Statement: This tells you how cash is entering and leaving your business in a given period. It answers the crucial question: “Do I have enough cash to pay the bills?” Looking at the balance in your bank account rarely provides a truthful answer as to how much cash you actually have to spend.
2. Uncover the Story Behind the Numbers
You don’t have to get buried in the details. Focus on a few key numbers that give you a clear picture of your business.
- Revenue and Expenses: Found on the income statement, these numbers show what’s coming in and where it’s going. If your expenses seem too high, it’s time to look for savings.
- Gross Profit Margin: This tells you how much profit you’re making after covering your costs. If this number shrinks, it might be time to raise prices or cut costs.
- Cash Flow: Look at your cash flow statement to see if you’re bringing in enough cash to keep things running smoothly. Are you in a position to handle an unexpected payout?
- Debt vs. Assets: On the balance sheet, compare your liabilities (debts) to your assets. Too much debt can be a red flag.
3. Turn Insights Into Action
Reading your financial statements isn’t just about tracking what’s already happened—it’s about planning what’s next. Here’s how you can use them to grow your business:
- Spot Trends: Are sales going up or down? Are costs climbing? By recognizing patterns, you can make better decisions in advance rather than reacting to surprises.
- Set Goals: Use your numbers to create achievable goals, like boosting sales by 15% or trimming unnecessary expenses.
- Make Confident Decisions: Whether you’re hiring staff, investing in equipment, or launching a new product, use your financial statements to help you decide if the timing is right.
4. Don’t Hesitate to Ask for Help
It’s okay if financial statements feel confusing. That’s where we come in. At Compass CPA, we help Ontario business owners understand their numbers and use them to grow. Whether you need help filing taxes, organizing your books, or creating a game plan for the future, we’re here for you. Contact Compass CPA today to book a consultation.
