QuickBooks creates a framework around your debits and credits. However, if data are not entered correctly or you do not understand how to interpret the financial reports, you are not getting the insight you need about your business.
You need current financial statements for good business decision-making. For accurate numbers about your business, consider the following:
- Are you making money this month, quarter, or year?
- Is there enough money in the bank to pay for current payroll, fixed expenses, and inventory purchases?
- Are your fixed assets fully depreciated and need replacement?
- Are your current payables to vendors larger than your current receivables from customers?
- How much in taxes will be owed on current-year profits?
- What is the current equity position of the company?
Your financial statements can tell you what is happening in your business today and what you likely can expect for tomorrow.
First, you should learn two critical financial statements:
- Balance Sheet: This reveals what a company owns and how much money it owes at any point in time.
- Income Statement: This statement shows how much money a business has made and how much it has spent over a certain period of time.
When reviewing a balance sheet, the three most important items to note are assets, liabilities, and equity. Assets are anything owned by the company that has a future value (cash, receivables, equipment, trademarks). Liabilities are amounts owed to others such as vendors, banks, credit cards. The difference between what you own and owe is equity. If the equity portion of your business is a positive number, it means your business is healthy. If equity is a negative number, your business is losing value.
The three most important aspects of an income statement are gross profit, operating expenses, and net income. Gross profit gives insight into sales and associated costs to produce those sales and can determine whether your gross margin is adequate. The key is isolating overhead expenses. Without enough gross profit to cover these expenses, you will be operating at a loss.
What Financials Say About Tomorrow?
The availability of working capital, also known as the excess of current assets over current liabilities, is important to sustain a company. Extending too much credit to customers, and noncompliance with vendor or creditor terms can lead to insolvency and ultimate closure of a business. Additionally, if a business continues to show no profit, it will not have any cash left to continue operations.
Various ratios and analytical computations can be used to predict the financial future of a business. Some common measurements that can be found within the balance sheet and income statement include:
- Current Ratio: Current Assets/Current Liabilities. Used to determine the ability of an enterprise to meet current obligations.
- Accounts Receivable Turnover: Net Sales on Account/Average Accounts Receivable. Used to assess the efficiency in collecting receivables and the management of credit.
- Inventory Turnover: Cost of Goods Sold/Average Inventory. Used to assess the efficiency in the management of inventory.
- Ratio of Stockholders’ Equity to liabilities: Total Stockholders’ Equity/Total Liabilities. Used to indicate the margin of safety to creditors.
As you build and grow your business, it is important to understand these accounting terms.
Contact Jason A. Mattina, CPA for assistance with using QuickBooks to accurately interpret your financials.