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What If I say; “go ahead and calculate your business’s key financial ratios for me would you”. Would you give me a 'blank look' and politely ask me to leave? Well, here's a secret, you don’t need to be a math whiz. All you need is your business’s financial statements and a calculator. What is missing for most small business owners is… i) an understanding of what the financial ratios are, ii) why you should calculate them, and iii) an example to work through. Hopefully we can cover off these 3 points in this article.
For many in small businesses the Statement of Financial Position (widely known as the Balance Sheet), one of the four Financial Statements, is something that they pay little attention to, mainly because of a lack of understanding of what it all means. Well, to begin with it doesn’t have to be complex. Let’s look at the key points to understanding your Statement of Financial Position / Balance Sheet.
Make your Income Statement (Profit & Loss Statement) more valuable! This is simple, logical and direct advice that any business owner should listen to. However, ‘how to’ achieve this is perceived by many in small business as anything but simple. In fact, this is not for the most part even true, most people don’t even consider that their Income Statement can or should be more valuable or how this could be beneficial, let alone ‘how to’ achieve improvement. It doesn’t have to be so challenging or confusing, and ignorance is costly.
Allocating a purchase of some sort (which is a cost to your business) to the correct area of your Income Statement is very important. Get this wrong and you will be calculating an incorrect GPM%, and potentially making some very bad decisions based on the poor information you have.
The headline act of the four key financial statements has to be the Income Statement, also known as the Profit & Loss or Statement of Financial Performance. Put simply, it tells you how well your business is performing. But just because it is important doesn’t mean anyone has ever explained to you what the basic parts are and why some key data is include in one section and not another, or even how to read them so that you can make better decisions to help improve your business. There are lots of separate articles to write on this topic but let’s consider the basic points first;
Understanding financial statements is a necessary skill all small business owners need to have. You must know; 1) What the numbers mean on the page, 2) How to calculate further ratios from the raw data, and 3) what to do to affect your results in the future. Let’s look at the basics;
When discussing business vs personal expenses and deductions or leasing vs renting vs owning assets and all manner of other tax and structure issues, I quiet often hear business owners say "my accountant never told me this", "or my accountant isn't very proactive, they just do my end of year accounts and I see them once a year and they tell me how well or badly I'm doing".... Does any of this sound familiar? If you've felt like this before, then I've got a solution for you, learn how to quickly resolve this issue...
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