By - Sandi Webster

Critical Year-End Review: Top 3 Financial Metrics for Business Success

I’m not a CPA or accountant or a bookkeeper.  But, as a business owner, I needed to be able to check specific line items for our financials…and know what they meant.  My former CFO gave me a detailed list of the top three (3) pieces of financial information business owners should review at the end of the year:

  1. Financial Statements: Review your income statement, balance sheet, and cash flow statement. This will help you understand your company’s financial health, profitability, and liquidity.

 

Reviewing financial statements is crucial for business owners to understand their financial health. Here are specific line items to review to help you make informed decisions:

 

  • Balance Sheet:
  1. Assets:

– Current Assets: Includes cash, accounts receivable, and inventory. Reviewing these helps assess liquidity and the ability to cover short-term obligations.

– Fixed Assets: Such as property, plant, and equipment. Evaluate their depreciation and the potential need for replacement or upgrades.

  1. Liabilities:

– Current Liabilities: These include accounts payable and short-term debt. Monitoring these helps ensure the business can meet its short-term financial commitments.

– Long-term Liabilities: Such as long-term debt. It helps us to understand the long-term financial obligations and interest costs.

  1. Equity:

– Retained Earnings: Reflects the cumulative profits reinvested in the business. Track how much profit is retained versus distributed as dividends.

  • Income Statement:
  1. Sales Revenue: The total income from sales of goods or services. Analyzing trends in sales can indicate growth or decline in business performance.

 

  1. Expenses:

– Cost of Goods Sold (COGS): Direct costs attributable to producing goods sold. Reviewing COGS helps in understanding gross profit margins.

– Operating Expenses: Includes salaries, rent, and utilities. Monitoring these helps control costs and improve operational efficiency.

 

  1. Net Income:

– Profit or Loss: The bottom line of the income statement. Assessing overall profitability and making strategic decisions based on profit trends is crucial.

 

  • Cash Flow Statement:
  1. Operating Activities:

– Net Cash from Operating Activities: Indicates the cash generated or used by core business operations. Assess the business’s ability to generate cash flow from its primary activities.

  1. Investing Activities:

– Net Cash from Investing Activities: Reflects cash spent on or received from asset investments. Reviewing this helps understand the business’ investment strategy and capital expenditures.

 

  • Financing Activities:

– Net Cash from Financing Activities: Shows cash flow from borrowing or repaying debt and equity transactions. Evaluate how the business is financing its operations and growth.

 

  1. Budget vs. Actuals: Compare your actual financial performance against your budget. Identify any variances and analyze the reasons behind them to improve future budgeting.
  2. Tax Planning: Ensure all tax obligations are met and explore opportunities for tax savings. Consider consulting with a tax advisor to optimize your tax strategy.

By regularly reviewing these line items, business owners can gain insights into their financial position, identify areas for improvement, and make informed strategic decisions.