Financial Statements

More importantly, we can help you use these statements, as well as other reports, to better manage your business and increase your profitability.

Good financial records are necessary for several reasons:

• Daily operating decisions are based on financial reports.
• Bank loans require reports of past performance.
• Tax return numbers need proper substantiation.

Prepare financial reports monthly. For year-to-date comparisons and to make quick management decisions, financial reports must be done monthly. “As goes the month, so goes the year.” You can compare the sales, gross profit, and net profit at, say, the end of May, with prior years and get a good idea of how the current year will finish. You can compare the total accounts receivable or payables with prior years to spot problems and then quickly take corrective action.

Here are some common business ratios you should monitor on a month-by-month and a year-by-year basis:

• Current ratio — Current assets divided by current liabilities will measure your ability to pay your current debts.
• Debt to equity ratio — Total liabilities divided by net worth will provide you with a year-to-year comparison of your ownership in the company.
• Receivables outstanding — Receivables divided by average day’s sales will give you the number of days’ sales on the books.
• Profit margin — Gross profit divided by net sales will allow you to compare your business operations to other companies in your industry, as well as monitor your own operations over time.