What Are Your Financial Statements Telling You About Your Organization?
For business owners and nonprofit leaders, financial statements are like doctor’s appointments. To keep your business healthy, you perform regular exams based on specific accounting periods, and you see your tax professional for intermittent check-ups and an annual physical. Financial statements generally include a balance sheet, income statement, and cash flow statement. Like lab work, those statements can tell you how your organization is feeling financially and provide you with preventative care to head off potential financial health issues in the future.
Balance Sheet: The Stress Test of Accounting
Your balance sheet helps you gauge liquidity, or see if you are healthy enough to take on new endeavors, such as hiring more staff, borrowing additional capital, or investing in equipment. It shows your organization’s physical assets, such as inventory, buildings, equipment, vehicles, investments, and intangible assets, such as patents and trademarks. Those assets are balanced with (equal to) your liabilities, such as long-term and short-term debt, and your stockholders’ equity.
Income Statement: The Treatment Plan of Accounting
Your income statement essentially provides you with a diagnosis, as well as the tools to formulate an appropriate treatment plan. It shows your organization’s earnings before interest, taxes, depreciation, and amortization (EBITDA), but it also provides insight into the relationship between gross, operating, and net profits and revenue. Using this statement, you can glean valuable data on margins, such as your gross profit margin (revenue from the sale of a product or service minus the cost of making the product or providing the service) and your operating profit margin (operating income /net sales).
Examining your gross profit can help you decide on pricing adjustments or cost negotiations with vendors to ensure your production costs are not consuming your profits. Analyzing your operating profit margin reveals your organization’s percentage of profit produced from operations. It tells you how much you make on every dollar of sales after variable production costs, such as wages and raw materials, and before deducting interest expenses or taxes.
Cash Flow Statement: The Complete Blood Count of Accounting
Your cash flow statement tells you whether you had a net increase or decrease in cash during the accounting period, or whether your organization has a clean bill of health that supports profit and growth. It shows you how your organization’s profits are generated from cash flowing in and out from investments, operations, and financing activities.
Looking at your cash flow statement can help you ask the right questions, and head issues off at the pass. It alerts you to investigate and manage unusual changes in the way you are handling debt and inventory. If accounts payable is unusually high, you may be delinquent on your financial responsibilities to vendors and suppliers. Keeping an eye on cash flow reduces the risks of falling in the negative, and it can also reveal opportunities to increase cash flow, perhaps by collecting open accounts receivable.
Livingston & Haynes: The Specialty Care Physicians of Accounting
My team provides high-quality financial statement audits, reviews, and compilations that provide much more than a static glance at a balance sheet, income statement, and cash flow statement. L&H’s Accounting & Attest Service Group combines strategy, innovation, and technical skills to provide businesses and nonprofits with the tools to maintain strong operations and healthy finances.
I advise clients on potential factors that could affect their financial health, such as existing and new regulatory requirements, past and future market data, the effects of the COVID-19 crisis, and industry-specific best practices and concerns. I want to help your organization leverage all the data its financial statements already do, can, and should provide. If you’d like to learn more about what your financial statements are (or are not!) telling you, contact me today.
Wendi Haynes, CPA, specializes in accounting and attest services, including single audits, and in providing tax and business consulting services for nonprofit organizations. Wendi has completed the AICPA requirements to perform peer reviews as well as their Not-For-Profit Certificate Program I. She also works extensively with a wide array of businesses, focusing on the real estate and retail industries. Wendi has been with Livingston & Haynes for more than 30 years and serves as the firm’s Managing Partner and Quality Control Partner.