When it comes to for-profit businesses, the main objective is to create a positive return on investment for the owners as well as any investors and shareholders in the firm. This, of course, is done by generating as much profitability for the firm as possible. Therefore, to increase profits, organizational decision-making should be based around the financial performance and projections of the business which can be pulled from assorted financial reports such as a balance sheet or income statement.
As balance sheet is the detailed report of an organization's assets, liabilities, and shareholders’ equity during a particular period. In short, it shows what the organization owns in comparison to what it owes and what is invested by shareholders. An income statement details the profits and losses of a business for a particular period. An income statement will show exactly how revenue comes into the business as well as how it is expensed. By using these types of documents, which indicate the financial health of a company, businesses can make more sound decisions that will help them cut back in expenses as well as increase revenues to become more profitable.
When using financial statements as part of the decision-making process, you can have an accurate understanding of your firm’s cash flow. These avoid guesstimates and forgetting about certain fees and expenses while, at the same time, allows leaders to pinpoint where there successes and opportunities for improvement from a revenue stance lie. Below are four examples of business decisions that should never be made without the use of financial statements.
Making New Investments - Financial statements can tell you how your existing business investments are performing. When looking at finances over time, you should be able to tell how long it took the break-even, the rate of growth, how much growth has occurred and more. By taking the time to observe the financial outcomes of previous investments, it can help to serve as a guide into whether continuing to invest in aspects of the business that are performing well, how much to invest, what kinds of investments have helped to drive growth and so on. Additionally, it might help indicate what other aspects of the business that may be similar could also bring back high returns with an increase in investment. For instance, if a company started targeting a new market with an existing product and it performed better than expected, they may want to invest in bringing other related products to the same market as well.
Cutting Back Expenses - Financial statements can also tell you where the money is bleeding out of your business. Some investments may yield a low return or even simply be costing the organization money. Some assets could potentially yield a bigger return but don’t because of some of the associated expenses that could be substituted or removed. Some expenses may serve more as a “want” as opposed to a “need” and, by slashing it from the budget, it can help improve the financial help of the business. Consulting your organization financial documents can help you uncover exactly why things in your business appear to cost so much money item by item and determine whether or not the spend is essential.
Selling Or Liquidating Assets - Sometimes, it’s better to get parts of your business that have some value off your hands as opposed to trying to continue to operate them. There may be an offer on the table from a larger firm looking to buy a product or even your entire company, and the payout might make more sense than trying to scale it any further. In other cases, parts of your business that might just be a hassle or aren’t providing the desirable return might serve you better by shutting down and liquidating the assets into cash. Financial statements are a vital part of making these choices and understanding the benefits and consequences of alleviating the responsibility holding on to assets and business functions that may be better of being exchanged for cash.
Seeking Outside Funding - Everyone knows that it takes money to make money. Oftentimes, businesses need more money to fund their growth than they can make and so they need to obtain additional money through private investors, loans, credit, and other means. To receive funding, especially in the large quantities they often receive, they may need to present financial statements that can show how well the organization is presently doing and how they currently manage their finances. Financial statements aren’t just for internal decision-making, they also can be used by others who may consider lending or investing in the firm as well.
At The Vieras, we understand that keeping your financials in order is imperative but also a task many business leaders struggle to keep up with. Consider allowing us to take on your bookkeeping, financial reporting, and more. Set up your free consultation with us and focus your attention on revenue-generating activities while we keep track of them.