"I know I'm supposed to review these reports - what am I looking for?"
This is a common question that often perplexes small business owners - they receive their quarterly profit & loss statements and stare at them, not knowing what to look for. The typical response is to look at the bottom line - total net profit. But all of those figures above the bottom line are where the real work can be done.
Reviewing your Profit & Loss Report
“What am I looking for? There are so many income and expense accounts! Cost of Goods Sold? What do I do?”
Typically, when you're reviewing your Profit & Loss, the figures that stand out are the totals. Total Income, Total Cost of Goods Sold, Total Expenses, along with the Gross Profit and Net Profit figures. These are all good to know, and keeping track of these over time (typically monthly or quarterly) are sure to help your business grow, or at least diagnose problems within the business.
This report will be your bread and butter when it comes to converting sales into profit. Which class of income is the best money-maker? In which area are we spending too much money?
Balance Sheet
When you're looking at a company's Balance Sheet, you're looking into the heart of a company. You'll be able to tell what condition the business is currently in and whether or not it can meet all of its obligations.
Generally speaking, the balance sheet shows a snapshot of a company's current standings. The company's assets, liabilities, and the owner's equity are detailed on this report, and a simple equation allows you to determine how well a business is doing. These items should balance each other out (hence, balance sheet). The equation is as follows:
Assets = Liabilities + Owner's Equity
“Before you ride freely, you must first find your balance.”