How to read your financial reports correctly

Your financial reports are important measures of your business’ health. Here’s what to look for – and tools to make reading your reports easier.

Any business owner could click a button and pull an automated financial statement, like their balance sheet, income statement and cash flow statement, from their accounting software.

What’s more important than creating those financial reports is learning how to read them. If you don’t know what to look for, your reports won’t be very useful to you.

Among the things you should look for in your financials are trends and inconsistencies. You need that information to predict your business’ financials, plan for your tax liability, measure the health of your business and more.

Some business owners find it difficult to draw conclusions from looking at some raw numbers – so hiring an accountant to help you or using visual reporting software are often helpful.

While you’re analyzing your next financial reports, look for the things below – and see what new things you can learn about your business.

 

6 things to look for in your financial reports

Many small business owners don’t fully understand the value of their financial reports when they’re looking at the following indicators.

The two main areas to check across your balance sheet, income statement and cash flow statement are trends and inconsistencies. By intentionally looking for trends and inconsistencies across your financial reports, you can get a bird's eye view of your business and understand if you’re excelling, stagnant or declining – and why.

Examples of trends

Your financial statements can show you trends in your business you may not have been able to see otherwise. Here are a few common trends to look for – and why they’re important:

  • The seasonality of your business: Your business might be making more money at certain times during the year or dipping below average in other times. Knowing when that happens in your business can help you forecast your earnings accurately – and plan for things like cash flow and staffing. 

  • Revenue month over month: By reviewing your revenue month over month, you can measure your business’ growth. Your revenue can measure whether your business is excelling or declining – or whether you’re losing or gaining customers.

  • Contribution margins: Contribution margins are the difference between how much you make from a product or service and how much it costs you to produce or offer it. Your sales and your contribution margins are positively correlated – which means when one rises or declines, so does the other in most cases.

Examples of inconsistencies

Your books aren’t always accurate – which means your financial reports might have inconsistencies. If you don’t know where to look for inconsistencies, you might miss major errors – and misinterpret how your business is performing.

  • Actuals against budget: Check whether your financial reports match up with your budget every month. If your budget and actuals aren’t aligned, then that’s an opportunity for you to learn where you didn’t plan accordingly and where you can cut back to stay on track with your budget.

  • Fixed and variable costs: Your fixed costs are ones that stay the same every month (or quarter or year) and variable costs are ones that fluctuate. You should monitor your financial reports to make sure your fixed costs are consistent – and whether your variable costs are correlating correctly with your business activity.

  • Inventory: Look at whether your inventory aligns with your cost of goods sold (COGS) on your financial reports. Knowing what you have in inventory and how much you’re selling could help you notice red flags on your reports.

How to make reading your financial reports easier

You could always look at your financial reports on your own, but these three ways can save you time and help you draw conclusions more effectively.

Hire an accountant

An accountant can help you read your financial reports – but most importantly, they can help you understand them.

A good accountant will take your reports and look for your trends and inconsistencies – and get to the bottom of what they mean and why they happened. Once you understand why your financials look a certain way, you can fix them or plan around them.

Use visual reporting software

Reporting software can help you visualize your current and projected financials in charts and graphs.

 

Your accounting software is responsible for keeping track of your numbers and gathering financial reports – but doesn’t necessarily give you visualizations to understand them. Visual reporting software restructures the data from your income statement and balance sheet in an easier-to-read and more useful format.

Without reporting software, the only way to read your financial statements is by looking at a sheet with numbers – or by looking at a hard-to-read Excel spreadsheet. Visual reports can help you make better decisions for your business whether you use it on your own or with a bookkeeper.

Analyze reports often

You should be looking at your financial reports either monthly or quarterly. If your business is in its early stages and doesn't have an overwhelming number of sales or transactions, then a quarterly reporting frequency might work for you.

But if your sales or activity are growing, it’s useful to analyze your financial reports monthly. This makes it easier to read your reports because anything that happens to your business is fresh in your mind.

Avoid looking at your financials on an annual basis. Waiting that long makes it harder to look back at trends or inconsistencies and determine why they happened. You could have closed a big deal, or maybe ran a sale one month. It can be difficult to look at your numbers without having that additional context front of mind.

Learning to read your financial reports isn’t much different from learning to ride a bike. The more you do it, the better you’ll get at it. You’ll learn what’s important and what’s not – and be able to spot trends and inconsistencies faster.

The bottom line

Your financial reports like your balance sheet, income statement and cash flow statement are key to measuring your business’ financial health. However, many business owners aren’t sure what to look for when they create their reports.

Small business owners should be looking for trends and inconsistencies in their financial reports. Some ways to make that easier are by hiring an accountant, using visual reporting software, and checking your reports on a monthly or quarterly basis.

Having an expert by your side can help you understand your reports better and empower you to learn how your finances work. They can also offer you tools, like visualized reports, that easily show you how your business is doing. Schedule a free call with a DiMercurio Advisors team member today to get in touch with an expert and start using financial reports to level up your business.

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