Profit. This is the buzzword that drives businesses today. How PROFITable were we? Yes, but what was the PROFIT margin? Of course profit is important. If a business is not profitable, it will not survive. One way that most companies find out their profitability is with a Profit and Loss Statement or an Income Statement.
This document totals all income streams a business has and subtracts out all of its expenses to get was is called a Net Income if the income is more than the expenses or a Net Loss if the reverse is true. It does not take into account any outstanding liabilities the company has and this is one of the reasons why it should not be the primary focus when it comes to your financial statements.
To better gauge the financial fitness of your business there are some other financial reports you should add to your monthly statement review.
- Balance Sheet – The reason it is imperative to review this document is because this is where you will find accumulated depreciation and liability errors.
- Statement of Cashflows – This shows you how your money moves. Reviewing this document frequently will help your company prepare for the rise and fall of your cash flow.
- KPI (Key Performance Indicator) Statements – Often created for internal use, tracking the average dollar amount spent by customer, city with highest sales, or most purchased item can also aid in determining the direction your company wants to continue to remain profitable and grow.
Periodical reviewing of the Balance Sheet will let know what your liabilities are and this will aid you in determining what your ‘Working Capital” is. To me, working capital is defined as all the money left over from any and all financial obligations such as expenses, liabilities, and other lines of credit. This number can also include a percentage you, as the owner, would like to retain as profit.
In combination with the 3 reports listed, your financial statement analysis can become the springboard that launches your company into the stratosphere. Major financial decisions can be made when reviewing these 4+ reports for example, diversifying investments, consolidating debt, establishing another line of credit, and much more. Let AMH help you understand your numbers and advise you on your options.