According to a study recently published by the consulting firm Bain & Company, only about 10 percent of all businesses are capable of achieving sustained, profitable, and continuous growth. To ensure that your business is capable of pushing itself into this talented group, you will need to pay careful attention to your financial statements and make a few adjustments.
Start by doing monthly financial statement analysis on your cash flow statement, income statement, and balance sheet. If you’re not sure where to start or what you’re looking for when you do this type of review, check out this guide.
While going through your financial statements each month may seem to be a bit of a formality, these statements can help you get a much better understanding of where your business stands, and the types of changes you will need to make to meet your goals.
Even if you have a financial advisor by your side, it will still be beneficial to take a close look of your own, especially if you’re looking at ways to grow your business, or you’re facing a big-spending decision.
In this article, we will discuss seven of the things you should be actively looking for. Making just one small change in your course of doing business can have countless positive effects, rippling forward over time. After reading these 7 key insights you can get from your financial statements, you will be mad at yourself that you weren’t doing it before!
1. Opportunities for outsourcing
For your business to live up to its full economic potential, you will need to cut costs in every way that you conceivably can. Outsourcing finance and accounting tasks to qualified experts will often decrease your overall costs and increase overall quality—and you might find that there are other repetitive tasks that you might be able to outsource to save you time and money.
Tasks such as accounting, systems management, and financial reporting are among the most frequently outsourced tasks. In fact, in the Bain study, of the 10 percent of companies that were considered to be financially viable, 85 percent utilized “capability sourcing” or other strategic methods of outsourcing.
As you can review your financial statements, keep an eye out for tasks that could potentially be handled by someone outside of your company. Outsourced firms will do the work that you are incapable of or too busy to do, and outsourcing your work will give you the time and energy to focus on other parts of your business.
2. Possible tax deductions
There are hundreds of unique tax deductions available for businesses and these tax deductions can have a considerable impact on your bottom line. By making an effort to be “tax conscious,” you can improve your profit margins without needing to make any structural changes. It is also important to always be aware of the tax law changes because they can affect your business differently every year.
Reviewing an expense report can help you find key items to be deducted from your business’ reported income. These items can include anything ranging from transportation expenses to marketing costs, and up to 50 percent on professional lunches. Saving your receipts throughout the year will also make the deduction process much easier.
3. Signs of fraud
Even if your business is rather small, there will always be at least some risk of fraud.
To minimize the likelihood of financial information being compromised, consider the following actions:
- Make sure that all confidential information is reviewed and opened directly by you
- Separate essential financial tasks (billing, deposits, accounting, etc.)
- Set up automatic bill payments, when possible
- Establish a clear set of standardized accounting practices
- Review your financial statements often
Fraud prevention is an active process; the longer you go without reconciling your books, the more likely instances of fraud will remain unnoticed.
4. Opportunities for expansion
If you are like many business owners, you probably have ambitions to grow and expand your business over time. However, whether this means purchasing an office, opening a new location, or testing a new product line, the timing of your expansion will be absolutely critical.
Your financial statements will help illustrate whether expanding your business is a feasible possibility or not. Your profit margins, your debt to equity ratio, and your future cash flow projections (deducted from your cash flow statements) will all be quite relevant. Working with an accountant or business advisor can help you interpret this information more objectively.
5. Redundant expenses
Ideally, your business will have already eliminated all your redundant expenses. However, most annual reports reveal that a business is paying for the same outcomes multiple times.
Many of these redundancies will not become apparent until your business’ books have been clearly categorized and quantified. Making changes to your employment structure, operating choices, and other systems can make a major difference over time.
6. Accounting equilibrium
As any accountant will tell you, accounting equilibrium is an absolute must. If your assets do not equal your liabilities plus owner’s equity, then there is guaranteed to be something wrong with your books.
The lack of accounting equilibrium can indicate many things including inaccurate figures, incorrectly categorized entries, and even some cases of fraud. Regardless of what may be causing this issue, it will need to be quickly addressed and corrected.
You may want to consider purchasing specialized accounting software, such as QuickBooks or Xero if you’re still doing your accounting in spreadsheets (or not at all). This will help you manage your sales and expenses and keep track of daily transactions.
7. Opportunities for automation
In addition to actively monitoring for opportunities to outsource, your business should also be looking for opportunities to automate. To determine whether automating is right for you, you will need to conduct a comprehensive analysis with opportunity costs in mind.
Each year, your business should consider conducting an internal “audit” where you carefully weigh new technology—machines, software, internet of things (IoT), etc.—against your current operating needs. While automation is not always in your business’s best interest, it is often one of the most available ways to secure a competitive advantage.
Your financial statements—which include your balance sheet, income statement, cash flow statement, and various others—are much more than just a formality. They illustrate the status of your business, its flaws, and its most valuable features.