Reading Reports – Guidance on Understanding Financial Reports
Financial reports help you see where your business stands today, where it’s been, and where it’s heading. For small business owners, the most important goal is simple: Focus on driving revenue—so long as the cost of goods sold (COGS) for each sale is lower than the revenue it brings in, every additional sale contributes positively to your bottom line.
1. Drive Revenue (Your #1 Focus)
If your COGS % (Cost of Goods Sold ÷ Sales) shows you’re profitable on each sale, then selling more will almost always put you in a stronger position. Don’t lose sight of that—growth starts with more sales, not with cutting yourself leaner and leaner. However, watching expenses is an important secondary focus to keep your bottom line healthy.
2. Watch Your Profit & Loss (P&L) Expense Detail
Look at the transaction-level detail to see exactly where money goes. Small businesses win or lose in the details—marketing spend, payroll, and vendor costs. Spotting leaks or waste early helps keep cash healthy.
3. Pay Attention to Month-over-Month (MoM) Changes
- Don’t panic if one month looks “off.”
- Focus on patterns over 3–6 months.
- Ask: Is this a one-time spike, or a sign of something real?
4. Track the Ratios That Matter Most
Skip the Wall Street–style ratios. Keep it simple:
- COGS as a % of Sales – are sales profitable?
- Net Profit Margin – how much you actually keep.
- Cash Runway (Cash ÷ Monthly Overhead Expenses) – your buffer if sales slow down.
5. Use Reports to Guide Action
Every report should lead to a decision:
- Sell more, as long as it’s profitable.
- Trim costs that creep up without adding value.
- Reinvest in what fuels revenue growth.
6. Why the Balance Sheet Matters
- Snapshot of financial health – Shows what your business owns (assets), owes (liabilities), and retains (equity) at a given point in time.
- Tracks stability – Helps you see if your business is growing stronger or carrying too much debt.
- Supports decision-making – Lenders, investors, and franchisors often look here first to assess financial soundness.
- Reveals cash runway – Indicates whether you have enough liquid assets to cover short-term obligations.
- Complements the P&L – While the Profit & Loss shows performance over time, the Balance Sheet anchors it by showing your true financial position today.
7. Why the Cash Flow Statement Matters
- Shows real money movement – Tracks actual cash coming in and going out, beyond just paper profits.
- Highlights liquidity – Reveals whether your business has enough cash on hand to cover bills, payroll, and short-term obligations.
- Separates activities – Breaks down cash flow into operations, investing, and financing, so you know what’s driving cash gains or drains.
- Prevents surprises – Helps you spot potential shortfalls before they become urgent problems.
- Supports growth planning – Clear cash flow visibility lets you know when you can reinvest, expand, or need to conserve.