Bringing Financial Statements to Life for the Small Business Owner

Financial statements are the ubiquitous staple of running a business, big or small. Unfortunately for many small business owners, financials often turn into a once-a-year check the box exercise for taxes or a business loan. That is an opportunity wasted, because curated and analyzed financial information can make a difference for strategic decisions and the success of a business.

Here are some ideas for bringing financial statements to life for a small business owner.

  1. Margin analysis

Margins are an early indicator for how well a company is managing its growth. Are expenses outpacing revenue? If so, what is the underlying reason? Is that trend sustainable in the long term? The conversation may uncover a need to re-negotiate the agreements with key suppliers or consider taking a deeper look at business processes to eliminate inefficiencies.

  1. Accounts receivable and collection cycle opportunities

Most small businesses have an untapped opportunity when it comes to optimizing their collection cycle. A small change in the company policy, or even a diligent enforcement of a policy already in place, can mean several weeks’ worth of sales being realized in cash (as opposed to sitting on the balance sheet as a receivable). More available cash can mean an opportunity to invest in equipment, hire another person, or boost marketing – all without needing a loan and incurring associated expenses.

  1. Cash flow risk analysis

Cash flow from operations is a critical metric that must be monitored closely. Negative operating cash flow can signal deep problems for the company with immediate corrective action required to survive.

Beyond operating cash flow, an accountant can add significant value by analyzing the cash flow trends and generating future projections for various scenarios. What happens if sales drop by 10 percent? What if a critical piece of machinery breaks down and must be replaced? Considering these and other “what-if” scenarios can guide the business owner towards a strategy and leave him better prepared.

  1. Benchmarking and trend analysis

Any one number considered alone doesn’t tell as powerful and coherent a story as multiple numbers put in the right context. As an accountant, you can give small business owner valuable insights and a look at the “big picture” by using benchmarks and trend analysis. Compare the metrics for the same company over time, or line them up with industry benchmarks (or even competitors, if the information is publicly available).

A holistic financial check-up, done regularly, can give small business owners an opportunity to understand financial statements and use them for strategic decisions and continuous improvement. It can also facilitate an in-depth conversation about running the business, which positions you to learn more about the industry, offer insights and advice, and build a reputation as a strategic partner.