Get under the bonnet of your business using financial statements

Business man reading financial statements on laptop

SMEs often lack specialist finance advisers to help them turn raw finance data into business insight. They often rely on their intuition to see the bigger picture, and hope to get the detail right. Professional advice is always worth seeking; if it will help you build strategy from complex financial information, but there's plenty you can do by yourself too, if you know what to home in on...

SMEs often don’t have the luxury to hire specialist finance advisers and consultants to help them turn raw finance data into business insight, and in these uncertain times during the Covid 19 pandemic there’s never been more of a requirement to get to grips with your business’ financial statements and data.

While professional advice is always worth seeking, there’s plenty you can do by yourself too, and having the facts at your fingertips will make any conversations with accountants and advisers more effective. However, it’s always good to know where to start looking. Here are a few pointers…. 

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1. Understand Financial Statements

We all rely on accountants to organise our financial reports and provide summaries, but it’s up to you as the business leader to make the clever, and sometimes tough, decisions based on this information. Whether it’s income statements, balance sheets or statements of cash flow, a solid understanding of each will help you to garner insights and respond faster to changing circumstances.

Your Income Statement, that is your Profit & Loss or “P&L”, will calculate your company earnings from multiple viewpoints by reporting net earnings and operations efficiency before the impact of taxes and financing. Once you see clearly where your money has been spent, it’s time to take a deeper look into those expenses. A few quick wins include:-

  • If you find unexpected price increases, it might be time to review contacts with vendors and suppliers and negotiate better trade terms.
  • If you see regular paments for subscriptions is definately worth reviewing these to see if you really need them. These often small amounts every month can add up over a year.

2.  Crunch Cash Flow

Statements of Cash Flows report on the flow of cash into and out of your business. The statement of cash flows is only concerned with the overall amount of money coming in (inflow), compared to the amount of money going out (outflow). Cash inflows include income from sales, cash injections from loans, and accounts receivable collections; while cash outflows include equipment costs, inventory, and expenses paid.

The statement of cash flows will demonstrate your SME’s cash variation. In other words, what caused the balance in your bank account to increase or decrease. Understanding exactly where your cash flow pain and pressure points are, will help you to make important money-saving decisions. Can you afford a loan to finance working capital or purchase stock for projected sales, spread your purchase orders more evenly, or even plan them for special offer seasons? Having the answer to any of these questions will improve your business operations and ultimately add to your bottom-line.

3.  Forecast Sales

In these times of shutdown across many industries, your sales data is most likely looking a lot different to what you would have expected at the start of the year. Even when restrictions start to ease, the likelihood is that your business will need to adapt to accommodate for ongoing social distancing of staff and customers. All of this is going to impact your sales projections.

Rather than keeping these estimates in your head, consider making a Sales Forecast. Typically these would be a projection of your sales for the next three to five years, however given the times we’re working in, you may find it more relevant to look at the short term in detail and then make some estimates about how your business may return to “normal” over the medium to long term.

Using different sections for each sale type and a separate column for every month for the first year, and monthly or quarterly columns for the next three to five years, you can map your projected sales. By providing separate blocks for pricing, unit sales, calculated sales, unit costs and unit costs of sales, you will be more able to see your gross margin and plan your cash flow or time to expand more precisely.

4.  Balance the Numbers

By comparing your income statements from different accounting periods, you can monitor whether your business has been more or less profitable over time. It is also useful to demonstrate concretely for any applications for loans, financing or government supports how your business has been affected by the Covid-19 outbreak. Plotting trend timelines for your spending and production processes, will help you uncover where to target your business strategy for growth. Taken together with your Balance Sheet, showing your overall financial health including your liabilities, equity and ultimately your assets, using your financial statements you will now be able to determine the true cost of running your business, your capital reserves or your ability to finance additional working capital as and when you need it.

5.  Apply for supports and grants

Now you’ve got to know the status of your business through understanding your financial statements, you don’t have to go it alone. There are a wide range of supports and grants available from international, national and regional government bodies and agencies that are designed to help your business first weather the Covid-19 storm, and to help your business grow. Here are a few places to start looking:

The Local Enterprise Office offer a range of supports for smaller businesses on their response hub, including a Business Continuity Voucher to help you develop short and long term strategies to respond to the Covid-19 crisis.

Enterprise Ireland Clients can avail of a range of strategic marketing and other voucher schemes through their support schemes.

Businesses located in a Gaeltacht region can also avail of schemes though Údarás na Gaeltachta.

Finally, if your business could benefit from additional working capital to aid cash flow or to adapt to the new normal, Linked Finance is here to help.  We can provide simple, no hassle unsecured business loans with minimal paperwork and no strings attached to drawdown. Apply now.

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