Archive for May, 2009

All businesses run on the steady amount of finances. This is an undeniable fact, no matter which way you look at it. Without finances, the business is as good as non-existent. You can hardly ever see a person setting up a business without meaning to make good profits out of it; or without investing some serious bucks to launch it. But the sadder truth is: most people do not even want to look at their own company’s business finance status, thinking that this would be a bit too much to take. They usually let their accountants or other people who are knowledgeable with “figures” to handle the books, while they handle the operations. Although this situation is viable, especially if you have trusted people handling the books, it still pays to know how to read and understand your company’s own business finance statements.

Advantages of knowing how to read business finance statements
There are two primary reasons why you should know how to review your company’s books. One: this limits the possibility of being left out in the cold by unscrupulous individuals who might be fleecing your account. It is fairly easy to create a fake ledger that claims losses, when the real account shows more than marginal profits. In cases like these, many business owners do not even know that money is being siphoned elsewhere until the company folds. Even the slightest know-how on reading financial statements can help you detect discrepancies in ledger entries, and thereby save your money before someone else pockets it.

Two: you can make more informed choices as to the amount of money you should be raking in, and the amount of money that should be spent on behalf of your company’s expansion and financial growth. If you keep relying on someone else to handle the “business” side of your affairs, your company will pretty much remain stagnant and eventually become unprofitable in the end. Your financial statements can show you where you might be spending too much money on ventures that create the least profit; and what areas you can improve in order to save on cash, but increase production as well.

How to read your balance sheets
When it comes to your balance sheets, you simply deduct your current assets by your current liabilities; then reduce to simplest terms in order to acquire a ratio. A ratio of [1:1] (current asset: current liability) is good. This means that your current assets are enough to cover your liabilities. A ratio of [2:1] is better. This means that your assets are above average, and you are not spending more than your means. However, if the ration is [n:(less than 1)] then it means you are spending more than your company can sustain. This is an indication that your company is on its way to debt if you do not limit your expenditure in a hurry.

Your company’s current assets are culminations of your accounts receivable, cash at hand, inventory and everything else not considered as long term assets (e.g. assets expected to last more than a year, equipments, production tools, real estate, vehicles, etc.) Current liabilities are culminations of debits and loans you have with other business entities that should be paid within the next year.