By Brian Ravencraft
Growing financially is a top goal for any agribusiness. What many business owners don’t realize is that they have a tool that can readily use to help with their growth right at their fingertips. I am talking about your financial statements. They provide a glimpse into ways to use and shift funds to the benefit of your operation.
Financial statements prepared by a CPA can help identify financial and operational deficiencies and uncover areas for cutting costs and generating revenue. Let’s take a closer look at what these statements are and what information you should be monitoring.
Which statements should you examine?
These statements include the balance sheet, income statement (which is also referred to as a profit and loss or P&L statement) and statement of cash flows. The balance sheet lists the business assets, liabilities and owner’s equity at any given point in time. Assets typically include cash, equipment, furniture, computers and other machinery, signage, and inventory. Liabilities typically include accounts payable, accrued liabilities, notes payable and long-term debt.
The income statement reports sales, cost of sales and expenses over a given period. The difference between these amounts is your profit (or, if negative, your loss).
The statement of cash flows reports cash inflows and outflows. It shows changes over a period, instead of an absolute dollar amount at a specific point in time. It’s important information because businesses need to have enough liquid cash on hand to meet operating expenses and purchase fixed assets.
Cash flow statements are usually divided into three parts that review cash flow from operating, investing and financing activities. The net increase or decrease in cash for the period being measured is reflected at the bottom of the statement.
What should you look for?
You can get the most out of your financial statements by knowing how to analyze them. Consider the balance sheet: Improve cash flow by scrutinizing the balance sheet for trapped working capital. You also can use information from the P&L to improve performance.
You can also calculate financial ratios from information contained in the income statement. Examples include:
- Net profit to sales,
- Total expenses to sales,
- Net profit to gross profit.
These ratios should be compared to industry benchmarks, your CPA can help you with the exercise. They also can be compared to the previous month or the same month last year.
This is really just the tip of the iceberg when it comes to using your financial documents to aide you in business growth. If you have questions on this topic or if I can be of help, please reach out.
Brian E. Ravencraft, CPA, CGMA is a Principal with Holbrook & Manter, CPAs. Brian has been with Holbrook & Manter since 1995, primarily focusing on the areas of Tax Consulting and Management Advisory Services within several firm service areas, focusing on agri-business and closely held businesses and their owners. Holbrook & Manter is a professional services firm founded in 1919 and we are unique in that we offer the resources of a large firm without compromising the focused and responsive personal attention that each client deserves. You can reach Brian through www.agribusinessaccounting.com or www.HolbrookManter.com.