How to Use Financial Reports to Grow Your Business

Balance sheet

A balance sheet gives you a snapshot of your company’s finances at a specific point in time. It lists your assets, liabilities, and equity.

The balance sheet formula is: Assets = Liabilities + Shareholders’ Equity

Assets are what your company owns, such as cash, accounts receivable, and inventory, while liabilities are what your company owes, such as loans or accounts payable.

Equity represents the difference between assets and liabilities and shows how much of the company’s value is owned by shareholders.

Income statement

The income statement, commonly known as the profit and loss statement, shows your company’s revenue, expenses, and net income over a specific period — usually a month or a year.

This report is important for understanding how much money your company is making and how much it’s spending to generate that revenue.

Cash flow statement

The cash flow statement shows how much cash flows in and out of your company during a specific period. It tracks cash inflows and outflows from operating, investing, and financing activities.

This report is important because it indicates whether or not your company has enough cash to pay your bills and invest in future growth.

Vertical analysis

The vertical analysis compares line items on your financial statements to a base amount, usually total revenue or assets.

This analysis is expressed as a percentage and is useful for identifying trends or changes in your company’s financial performance over time.

For example, a vertical analysis of an income statement may show that the cost of goods sold as a percentage of total revenue has been increasing over time, indicating a potential issue with cost control.

Horizontal analysis

With horizontal analysis, you compare financial statements from different periods to identify trends and changes over time.

Horizontal analysis can help to identify areas where a business is improving or declining.

Think about it like using various types of business analytics to help grow your business.

You can use predictive, descriptive, and prescriptive analytics to learn about your company’s finances, identify trends, and decide what to change to improve business.

Ratio analysis

Ratio analysis focuses on calculating and comparing ratios to measure different aspects of your company’s financial performance, such as profitability, liquidity, and solvency.

Ratios are often expressed as a percentage and can be compared to industry benchmarks to evaluate your company’s performance relative to your peers.

For example, a ratio analysis of your company’s liquidity might show that your current ratio is below the industry average, indicating that you may have difficulty meeting short-term obligations.

And like personal discretionary income, business owners need to calculate SDE, or a seller’s discretionary income, to determine how much money they can take out of their business to pay themselves.

These ratios can also help measure the success of your business and its attractiveness to investors.

If your eyes just rolled to the back of your head, don’t worry. There are several tools and techniques to help you analyze financial reports effectively:

• Financial modeling – creating a mathematical representation of your company’s financial situation and projecting future outcomes based on different assumptions.
• Trend analysis – comparing data from multiple periods to identify patterns and changes over time.
• Benchmarking – comparing your company’s financial performance to industry averages or competitors.
• Variance analysis – comparing actual financial results to budgeted or expected results to identify areas where performance is better or worse than expected.

Analyzing financial reports is important because it allows you to find the areas of strength and weakness in your business’s financial performance.

You can then share these results with your teams to improve your weaknesses. For instance, you can use one of the best notion widgets like Plus to share your financial data and insights with your team — which updates in real-time.

No more lags or stale presentations. You’ll always have access to the most accurate data. And one wrong or outdated figure can be very costly.

Budgeting and forecasting

Financial reports help you create a realistic budget and forecast for your business.

By analyzing historical financial data, you can identify trends and patterns to help you make accurate predictions about your future financial performance.

For example, suppose your financial reports show that revenue has increased steadily over the past few quarters. In that case, you might invest in new marketing campaigns to continue that growth trajectory.

On the other hand, if your financial reports show that expenses have been increasing faster than revenue, you might need to cut costs to stay within your budget.

That’s one reason companies keep announcing major layoffs when expenses outpace revenue.

Investment and financing decisions

Financial reports can also help you make informed decisions about investments and financing.

When you spend time in the weeds of your financial reports, you can identify areas where you might need to invest in growing your business.

For instance, you can start investing money in innovative techniques or technology to cut costs or increase output. Or even purchase rival companies or side ventures.

No matter how much money you’re willing to put into anything, you need to know if and when you can. Otherwise, it could backfire and bankrupt your company. And that’s the last thing you want.

And if you’re considering applying for a loan or raising capital, having your financial reports at your disposal can help you make a strong case for why your business is a good investment.

For example, suppose your financial reports show that your company has consistently high profitability margins. In that case, you can use that information to find buyers for your business and convince them they wouldn’t take on much risk during the takeover.

Identify areas for improvement

Financial reports can also help you identify areas where your business is struggling.

You can identify red flags like expenses that are too high or underperforming revenue streams.

For instance, if your financial reports show that your business is spending too much on employee salaries, you might implement a cost-saving plan that includes reducing salaries or cutting back on other expenses — like capping overtime meal spending on company credit cards.

The more accurate financial information you have about your business, the better you can handle any risks it might face. Keeping track of your finances will help you grow your business and keep liability risks at a minimum.

Some business structures, like LLCs, offer liability protection from the beginning, but this protection might be removed if you fail to manage your business properly.

One of the best ways to manage your business’s finances correctly is by opening a separate business bank account to keep track of all your cash inflows and outflows.

Separating your personal account from your business bank account gives you a clearer picture of all the moving parts. The red flags will clearly stand out using this methodology.

Set realistic goals and objectives

Finally, financial reports can help you set realistic goals and objectives for your business.

By understanding your financial performance and analyzing your data, you can set achievable targets for revenue growth, expense reduction, or profitability margins.

Suppose your financial reports show that your business has been consistently growing at 10% per year.

You might set a goal to increase that growth rate to 15% over the next year. In comparison, a growth rate of 50% seems aggressive based on past performance — although not impossible.

This type of goal-setting is important because it helps you focus your efforts and make measurable progress toward your overall business objectives.

What are the five basic financial reports?

The five most common are the balance sheet, income statement, cash flow statement, statement of shareholders’ equity, and the notes to the financial statements.

What are the three main financial reports?

The three main reports are the balance sheet, the income statement, and the cash flow statement.

How often should a small business review its financial reports?

Most small businesses benefit from reviewing key reports monthly, with a deeper look each quarter to guide budgeting and planning.