What Your Financial Statements Should be Telling You

For many small business owners, accounting is like a foreign language. Good accountants are the effective translators between business leadership teams and your financial data. Your financials are not just a report card on the health of your business, but a communication & accountability tool. At TGG, our goal is to be your partner and translate the financial data in a clear, concise and meaningful way that allows you to reach your goals.

Key Takeaways

  1. There are 3 main questions your financial statements should be answering for you each month
  2. The Income Statement or Profit and Loss is a report that the company’s revenue and expenses for a particular period
  3. The Balance Sheet measures performance over the life of the company
  4. The Statement of Cash Flow is a measure of risk and is an indication of risk tolerance
  5. The Chart of Accounts, which forms the foundational basis for financial statement presentation, is essentially a filing cabinet of all your company accounts together in one place
  6. GAAP stands for Generally Accepted Accounting Principles

What should your financial statements tell you each month?

Financial statements tell a story and contain significant information about your company’s financial health that allow you to make informed decisions. Without them, you’re essentially flying blind.

There are 3 main questions your financial statements should be answering for you in a given month:

  1. What happened? Most accounting departments stop in addressing this question, at best, or answer this correction incorrectly or too late.
  2. Why did it happen? Your Key Performance Indicators (KPIs) will help answer this question as good KPIs will allow you to better understand why results came out the way they did.
  3. How do we make it even better in the future? This where the “translator” metaphor gets put into action.

The 3 Major Financial Statements Income Statement, Balance Sheet and Statement of Cash Flow

The Income Statement or Profit and Loss is a report that the company’s revenue and expenses for a particular period. It can be broken up into 4 sections: Revenue, Cost of Goods (or Services) Sold, Operating Expenses and Other Income and Expenses. For example, sales and expenditures for a particular month.

The Balance Sheet (aka Statement of Financial Position for nonprofits) measures performance over the life of the company. It includes a summation of all activity since inception and is cumulative by design.  It measures management’s performance over a longer period of time compared to the Income Statement measuring operations performance over a finite period of time.

The Statement of Cash Flow is a measure of risk and is an indication of risk tolerance.  Consistently positive cash flows reduces risk and serves to empower management teams.

Time is also the most precious of all business resources.  This is one of many reasons why a 13-week Cash Flow Projection becomes so important. For example, you’re concerned about having enough cash to make payroll next week vs in 10 weeks. The potential solutions for making payroll next week are very limited while having 10 weeks to find a solution will allow you much more time to solve that problem.

The Chart of Accounts

The Chart of Accounts, which forms the foundational basis for financial statement presentation, is essentially a filing cabinet of all your company accounts together in one place.  It must be kept organized. The main account types include Revenue, Expenses, Assets, Liabilities, and Equity. There are different accounts for the balance sheet and income statement and a well-designed Chart of Accounts should separate out all your accounts to make it easy to answer the three critical questions each month.

At TGG, one of our first recommendations when start with us is to clean up your Chart of Accounts by consolidating similar accounts, clean up inactive ones and recommend new accounts that align with your business. That way, when we review financials with you are only looking at accounts that pertain to your business activity.

GAAP Accounting

GAAP stands for Generally Accepted Accounting Principles. They are standards that encompass the details, complexities, and legalities our teams use to ensure accurate accounting and financial data for our clients. GAAP compliance makes the TGG financial reporting process uniform and standardizes terminology, definitions, and methods across all of the different industries we work with.

The Value of a TGG Way Financial Package

There are several benefits of partnering with TGG to delivery your financial statements each month. These include, but are not limited to:

  • Timeliness: delivery on or before the 15th of the month so you can make important decisions
  • Clear and concise: our financial packages are presented in a condensed and easy to understand format
  • Goals: your goals guide our strategy thus your financial statements will tell a complete story
  • Trends: our statements illustrate current business trends using your KPIs
  • Profitability Recommendations: a value-added tool specific to your business and its current activity on how to gain profitability or reduce costs

Conclusion

Your monthly or quarterly financial statements should be telling the story of your business. They should reflect the goals you have and be used to help you get there. If your financials aren’t accurately telling you the story of your business, reach out to our team today!

This post was reviewed by our team of accounting and financial experts. TGG’s mission is to make business owners’ lives better through excellent financial management. We strive to provide the most up-to-date and objective information on accounting-related topics so our readers can make informed decisions based on factual content. All posts undergo a review process with at least one member of our Leadership Team to ensure accuracy.

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