3 Ways Good Bookkeeping Can Inform Business Strategy
You may be spending a lot of time focusing on marketing or sales to grow your business. But have you explored the data and insights available in your own books? Your yearly financial data can offer important insights that allow you to shape strategy and set smart business goals.
When you have access to updated reports, you can gain a lot of insight about what’s working (and what’s not working) in your business. Not sure where to start? No problem! Here are three financial reports that you can use to make informed business decisions.
Three Financial Reports Every Business Owner Needs to Review
#1. The Profit and Loss Statement
Your profit and loss (P&L) statement, or income statement, is sort of like a report card. It presents your financial results during a specific period of time by breaking down the revenue your business generated and the expenses your business incurred.
By analyzing your P&L statement, you can see how profitable your business was and what areas bring in the most money. You can use this information to make changes in areas that are not helping the business.
For example, if you own a restaurant and notice your food costs are higher than they were before, try to reduce that cost by making sure your staff is trained to use a standard portion for every ingredient put on a plate. Or, think of more affordable substitutions that will save money without detracting from the appeal of the dish.
This will help you control costs while making sure every menu item is consistent.
#2. The Balance Sheet
Your balance sheet summarizes key financial information on a given date (unlike the P&L statement, which shows profitability over a period of time). Your balance sheet can be a good indicator of company stability and liquidity.
The components of the balance sheet are:
- Assets
- Liabilities
- Owner’s equity
When you review your balance sheet, you can see how effectively you are managing your assets and turning them into cash. If something isn’t making you money, you may need to reconsider its place in your business.
#3. The Cash Flow Statement
Your cash flow statement reports money going in and out during a period of time and will tell you if you generated cash or lost cash. Your cash flow statement can help you make business decisions because it shows where your business is making money and losing money. When you have this information, you can make adjustments that maximize cash inflows and minimize cash outflows.
For example, let’s say you see your operating activities have a negative cash flow because you have too many employees working overtime. If you reduce the amount of overtime, your cash outflows will be smaller in your next cash flow statement.
The Importance of Strong Bookkeeping for Small Businesses
These are just some of the simple ways that having accurate financial data can help you make smart business decisions. When you have accurate, clear reports at your fingertips, you can make thought-out, strategic choices that will serve your business well into the future.
Don’t have time for bookkeeping? Outsource it! At BookWerks, we not only do small business bookkeeping, we also help our clients use their financial reports to make growth-oriented decisions. Quarterly, we sit down with each client to review their P&L, balance sheet and cash flow statement. If you’re ready to use your financial data to your advantage, schedule a FREE, NO OBLIGATION consultation to learn more.