Don’t just file away your company’s financial statements. There’s a lot business executives can learn by reviewing their financial statements – including their balance sheet and cash flow statement – in detail.
Below are five key indicators from your company’s financial statements every business executive should analyze for greater business insight:
Watch for increasing inventory. If production is expanding, increasing inventory may be warranted. But otherwise, it may be an indication a certain product or products isn’t selling and that you may have slow moving and/or obsolete inventory on hand. Divide your average inventory by sales. If this percentage is higher than prior years, you may have some old inventory that needs to be dealt with.
For business executives, it’s important to maintain proper inventory counts so you can accurately measure costs. Without an accurate count, you can’t control your costs. Make sure to leverage your technology to properly track inventory and associated costs.
Is your accounts receivable increasing? A growing accounts receivable is a positive business sign because it means you’re making sales.
But if your collection process is inefficient, those receivables will continue to grow and the cash flow will suffer. To remedy that, check your accounts receivable aging schedule. Make sure that receivables aren’t past due and if so, take a look at your collections process to identify any issues.
As a general rule, cash flow should track net income. If not, it could be indicative of slow accounts receivable collection (remedy tips offered above).
But when it comes to accounts payable, slow down on disbursement, especially if cash flow is an issue. Pay invoices according to the agreed upon terms, but realize there is typically no benefit for paying early.
Also, if your business has loans, make sure your repayments aren’t too much to handle and consider refinancing if possible. Your monthly loan payments greatly affect your cash on hand.
Are you generating “quality” revenue? Gross profit measures how well your product production is doing, which is the main point of your business.
Controlling your cost of goods sold – or COGS on an income statement – which includes direct labor and materials, will lead to a higher gross profit. Also, compare your gross profit percentage to prior years as well as benchmark against your industry’s average to determine quality of earnings.
This should be your primary concern as a business executive – your company’s bottom line. While there are many factors to look at when analyzing your performance, at the end of the day, what matters is if you are you generating income or not. Net profit depends on successfully managing general and administrative expenses paired with the previously mentioned factors.
Financial statements are far from extraneous accounting documents – with knowledge on what to look for, they can provide important insight on how to stabilize or grow your business. For advice on how to analyze your company’s financial statements or other profitability tips, contact Concannon Miller Senior Associate Harry L. Pietrouchie, CPA, at email@example.com or 610-433-5501.