Financial Fluency: How You Can Predict Financial Issues Before They Happen
January 31, 2020
We introduced you to three major reports in our previous blog post: Income Statement, Beginning Balance Sheet, and Cash Flow Statement. A fourth report is beneficial to your understanding of the financial foundation of your business: The Ending Balance Sheet.
This report, like your beginning balance sheet, reports your accounts receivable and accounts payable, but it weighs in the effect of all three previous reports to come up with a summary of what you might not be factoring into the equation.
Understanding this report can help you identify what aspect of your company is contributing to the financial problems you might be experiencing. This report can show you exactly how it is possible to be a profitable company without cash in the bank. One example may be that your company isn’t collecting all the money owed to you for services you’ve provided. Perhaps your struggles are rooted in those lengthy times between performing a service and being paid for it.
For example, you are buying the time of your employees, but the work they put in during the time you purchased from them could take a month or so before the return on it is actually collected. Does your company have enough to keep moving forward during that transition between cost and revenue?
That can have a direct impact on your financial health, but understanding your reports and how they impact one another can help you identify the problem. With the problem isolated, you can then work on a solution.
The problem with the Ending Balance Sheet is it’s like reading the newspaper when you wake up in the morning. Every activity detailed in each article is already at least a day old, and what happened in those reports can’t be changed now. You can only change moving forward. What if we told you there is a way to see the problem developing and change your course before your “morning news”, so you don’t have to come face-to-face with the news of a financial problem?
Initially, a lot of small businesses use what we call lagging indicators to measure their profits and productivity. Simply put, this means they measure an activity after the activity has occurred. How they measure this is the Financial View. The Financial View has been reviewed in the previous two blog posts which you can visit on our website, www.cpawv.com. However, it is possible to understand what’s coming down the pike rather than to evaluate the situation once it’s passed.
For more information, or to see how we can help you improve your financial fluency, give us a call at 304-292-9469 to reach our Morgantown office or 304-997-8377 to reach our Weston office.