5 Insights To Glean From Your Financial Statements
An entity’s financial statements provide valuable insights for current and potential customers, investors, suppliers, buyers, lenders, market analysts, and government agencies. For nonprofits, financial statements also provide information the organization’s board, current and potential donors, or volunteers may find insightful. However, financial statement data is perhaps most powerful to business owners, shareholders, and nonprofit leaders, especially those who can glean actionable insights from behind the numbers and between the lines. Here are five such actionable insights to glean from your organization’s financial statements.
#1 - Your budget provides you with an intended path, but your plan financial statements show the actual road you have traveled.
To maintain a balanced budget and successfully manage cash flow, business owners and nonprofit leaders must use their organization’s financial statement data to revisit and update the budget accordingly. For example, when you look at your cash reserves, ask whether they adequately hedge for emergencies or if you would have to rely heavily on financing. Did you account for seasonal or other applicable revenue fluctuations? Did outstanding bills, deferred revenue, or your borrowing capacity stand in the way of desired or needed investments?
This information is gleaned from data across multiple parts of your financial statements. Your balance sheet shows your assets, liabilities, and owners’ equity, so it provides a summary of your organization’s financial standing. Your income statement helps you understand the relationship between profits and losses. Your cash flow statement reveals how your organization’s profits are generated from cash flowing in and out from investments, operations, and financing activities.
#2 - When profits are slim and costs are high, it is time - without a doubt - to take a deep dive into your operations and expenses.
To ensure your organization minimizes costs and operational and financial inefficiencies, you have to address redundancies and missed opportunities. By examining your income statement, you can gather insight into the relationship between gross, operating, and net profits and revenue.
Your gross profit margin is your revenue from your products and services minus associated costs, so it helps you ensure your costs are not consuming your profits. Your operating profit margin is your percentage of profit produced from operations, which is calculated by dividing your operating income by your net sales. Your operating profit margin reveals how much your organization makes on every dollar of sales before deducting interest expenses or taxes and after variable production costs.
If your income statement tells a story of slim profit margins and high cost of goods sold (COGS), it may be time to consider increasing your prices or renegotiating terms with your suppliers.
#3 - If you have a firm grasp of your organization’s liquidity, it will be easier to leverage growth and expansion opportunities.
Your balance sheet helps you gauge liquidity, so the data it provides helps you determine whether you can take on new endeavors, such as hiring more staff, borrowing additional capital, or investing in equipment, software, or automated solutions.
Your financial statement data can also help you perform cost/benefit analyses, which can even help you determine whether outsourcing services, such as accounting, systems management, or IT, would be a more sustainable option.
Entrepreneurs, with start-ups or technology companies for example, can use their financial statements to determine whether they are investing too much working capital or keeping too much on hand, or whether they have too many resources in a single asset class or are distributing investments in a way that maximizes your ROI.
#4 - Mitigating risks plays a vital role in an organization’s financial and operational success.
Keeping an eye on cash flow reduces your organization’s risk of falling in the negative, and it often reveals opportunities to increase cash flow. For example, if accounts receivable is unusually high, it may be time to focus on collecting open accounts. If accounts payable is unusually high, it could be time to assess whether you have delinquent financial responsibilities, such as past-due payments to vendors and suppliers.
Looking at your cash flow statement can also help you stay ahead of issues related to fraud. For example, if you see an unusual change in how your organization handles debt or inventory, it can signal the need for investigation. At the very least, it may indicate the need for a new or modified internal control.
#5 - Benchmarking helps organizations measure where they stand and align themselves with the competition.
Financial statements provide valuable benchmarking data. Business owners can assess whether their company is growing at the same rate as comparable companies. Nonprofit leaders can assess whether their allocation of funds and resources aligns with comparable organizations. Entities can also assess whether their peers are affected similarly by current economic conditions or if their costs are significantly lower or higher.
Contact Livingston & Haynes
L&H’s Accounting & Attest, Business Tax, and Nonprofit Services Groups combine strategy, innovative ideas, technical skills, and industry knowledge to provide businesses and nonprofits with high-quality accounting, tax and advisory services.
Whether you need a financial statement audit, review, or compilation, or you need assistance with budgeting, cash flow management, reviewing expenses for missed tax deductions, or performing a cost/benefit analysis, my team can help. I want to help you understand more about what your financial statements are telling you. Contact me today to discuss your organization’s strategy.
by Steven J. Haynes, MBA
Steven Haynes, MBA, is an administrative partner at Livingston & Haynes. Steve’s firm, Emerging Business Partners (EBPI), became an affiliate of L&H in 2007. Steve specializes in bookkeeping, payroll, and business advisory services, including tax, M&A, and funding and equity transactions, for technology, entrepreneurial, and emerging growth firms.