Every business owner knows that cash flow tracking is vital to ensure profits. However, many entrepreneurs make the common mistake of focusing exclusively on everyday transactions while overlooking the big picture of business finances. In this case, ongoing accounts and invoices may become the proverbial trees that prevent you from seeing the forest of your company’s financial health.
Let’s dig into why macro-financial management is so important and why you should implement it.
Table of Contents
Why You Should Be Looking at the Big Picture of Your Business Financials
Having a bird’s-eye view of your financials is essential in making strategic organizational decisions. Small to medium-size business (SMB) owners may consider accounting solely as a balance between accounts payable and accounts receivable. However, knowing that you’re making profits and paying bills is not enough to understand your company’s financial trends.
Financial business management goes far beyond receiving cash and covering costs. Payments that do not seem significant in your profit and loss statement may influence your balance sheet. Looking at the relevant financial statements will give you the big picture you need to understand how your company uses its financial resources.
Once you have a broad picture of your company’s finances, you can use this information to:
- Measure the impact of production or marketing expenses, like purchasing software, hiring a specialist for a project, or investing in advertising.
- Plan your budget based on real-time financial info and historical performance data.
- Cut unnecessary expenses like redundant monthly subscriptions, overpriced team activities, and other costs that don’t contribute to your bottom line.
- Unite your company’s departments in working toward the same financial goals, like budgeting and profit targets.
- Engage and motivate your team by highlighting accomplishments and illustrating how team efforts make a difference in company profits.
- Set realistic goals and create a clever strategy for the company’s future growth.
What is the most common challenge small business owners face in growing their business?
Many business owners and managers don’t have the tools to interpret their profit and loss statements or balance sheets. They may look at numbers but fail to understand what these statistics mean for their business growth and management.
A major goal of Margin Authority is providing education for business owners to help them understand their P&Ls (profits and losses), balance sheets, and other financial statements. Profit and loss reorganizing can work wonders in supplying a clearer picture of business finances.
How Can You Know You Have a Broad View of Your Business Finances? Why Are Financial Statements Important?
Often, business owners are involved in their company in two main ways: research and development of products or services and day-to-day operations. Entrepreneurs may not have the skills, time, and resources to dedicate to big-picture financial management. Small businesses typically don’t employ a full-time CFO (Chief Financial Officer) to keep track of financial performance and strategies.
The optimal solution for SMBs would be to hire a fractional CFO (or financial consultant) service like Margin Authority. CFO services can help companies bypass financial roadblocks or navigate cash flow issues.
For example, at Margin Authority, we help businesses isolate KPIs (key performance indicators), including revenue per client, revenue growth, and profit margin. Viewing central KPIs enables business managers and CEOs to make the right financial decisions based on robust data.
You might compare this to driving your car. You know you’ve used a certain amount of gas to cover a certain distance. However, if you want a full picture of your vehicle’s performance, you need to monitor your oil, tires, fuel consumption under different conditions, and other parameters. A clear and informative dashboard puts you in charge of your car’s operation and makes sure you’re safe.
Similarly, your financial statements provide a clear roadmap of how your business performs, what works well, and what you could do better.
What financial statements should entrepreneurs use for developing business strategies?
Cash flow is one important financial statement that often flies under our radar. Overlooking cash flow happens not only in SMBs but also in large corporations. Your cash flow statement can give you a picture of your monetary obligations and clarify whether you are generating or losing money.
It is vital to grasp the difference between P&L and cash flow. The cash flow statement is a financial document that provides a detailed analysis of a business’s cash movements during a specific period. This statement shows where the company received or spent cash.
In contrast, profit indicates how much money the business has left after paying all its expenses. While many business owners tend to focus on the bottom line of profit, the cash flow statement gives a clearer picture of a company’s financial dynamics. For instance, a company may be profitable but run into growth difficulties due to negative cash flow.
In addition to P&L and cash flow, you could glean important information from the following financial statements:
- Balance sheet. Your company’s balance sheet supplies a snapshot of your business finances on a given date. It details the business’s assets, liabilities, and equity, which is the gap between the two former items. It runs down cash, accounts payable, accounts receivable, and, if applicable, the annual portion of the company’s debts.
- Profit margin over time. Your net profit margin statement shows how much net profit your sales generate. Comparing the current profit margin to historical numbers (or your competitors’ margins) can help you manage sales, expenses, and pricing.
- Accounts receivable (AR) days vs. accounts payable (AP) days. This statement allows you to see how much time passes until your business receives payment for the products or services it supplies. Proper management of AR vs. AP days helps control your cash flow and ensures you don’t run out of money to pay the bills.
Who can help business owners understand their financial statements?
Large corporations may employ a full-time dedicated professional, like a financial analyst or senior accountant, to put together and dissect financial statements. However, without the proper expertise, interpreting financial data can be difficult.
Many small business and startup owners try to function as a jack of all trades, handling development, networking, and finances simultaneously. This strategy isn’t very effective and often leads to poor business decisions.
Hiring professional fractional CFO services helps business owners put their financial statements to good use. This type of financial counseling can make the difference between groping in the darkness and following a straight, well-lit path.
Margin Authority can help you analyze your P&L, cash flow, and other financial statements necessary for running your business properly.
How Big-Picture Thinking Helps Your Business Strategy
So, why is the wider view so important in financial analysis? How can financial statements help business owners implement a smarter strategy?
When you were planning your business launch, you probably had a vision of what you wanted your business to look like and the goals you hoped to accomplish. However, the daily, weekly, and monthly grind can bog you down so much that you only focus on the next step and forget to scan the horizon for obstacles, opportunities, or trends that may influence your business.
It is a bit like parenting. While you were expecting, you excitedly charted out your child’s progress from preschool through Harvard. Now, with a baby in your hands, all you can think of is the next diaper.
Understandably, sometimes you need to hunker down and resolve your company’s immediate financial concerns. Keeping a broad view of your financials can help you evaluate your production expenses, operation costs, and other financial aspects of running your business. This is an essential step to effective business management.
In particular, analyzing financial statements is useful when you need to:
Plan for sustained growth
A sound analysis of financial statements can help you plan your next steps in growing your business, such as launching a new product or obtaining a loan for your company. It can help you compile a realistic macro-level plan for the next year, five years, or decade.
Your financial statements can help you leverage trends you may have missed. For instance, your balance sheet may indicate that a certain product or aspect of your service is responsible for the lion’s share of the company’s profits. In that case, it would make sense to focus on your highest-netting services or branch out into selling a related product.
Make real-time decisions
Financial statements help you see how much you can afford to spend at the moment—for example, on an end-of-the-year employee reward or slots at a high-powered business conference.
Why Work With Margin Authority
At Margin Authority, we focus on helping business owners manage their company’s financials for faster, more profitable, and more efficient business decisions. From financial risk analysis to cash flow optimization, our team is here to help your business leap forward.
Ready to achieve your business goals? Request a consultation today.