Financial Statement Savvy Improves
Chances of Business Longevity

A successful business is the dream of many Americans. But, did you know that according to the SBA's Office of Advocacy, more than 50 percent of businesses fail in their first four years? And one of the leading causes of failure is lack of capital.

So, what steps can you take to monitor capital and improve the odds that your business will succeed to a ripe old age?

One of the key contributors to success appears to be the owner's ability to understand and use his company's financial statements. Making it in today's business world requires more than occasionally looking at the bottom line on income statements. It involves understanding and interpreting what the income statement, balance sheet and some key financial ratios really mean to the success of a business. It involves using that information to make informed business decisions.

The first step in making good use of your financial statements is to acquire a good knowledge of what the reports are really telling you. The income statement is your best starting point. Also called a P&L, profit and loss statement or an income and expense report ... it is the summary of events that happened over a period time. It provides a report of revenue and expenses and is required for tax purposes. The income statement tells how the business is doing and how profitable it is. Information from the income statement can be used to make better informed decisions about your company's pricing, margin maintenance and expense control.

The income statement is good for showing information at a point in time, but how do you know if your numbers are good or bad? One thing you can do is look at trends by comparing dollar amounts from year to year, or month to month. Another option is comparing your results with others in the same industry. The best resource for industry data is the trade association for your type of business. When that is not available, another resource is industry standard information from RMA Inc., available at most libraries, MO SBTDC offices and University of Missouri Extension centers.

The second critical source of information is the balance sheet. The balance sheet shows what the company owns (its assets), what the company owes (its liabilities), and the bottom line (owner equity). It illustrates the financial condition of the company at a point in time. And just like the income statement, if you really want to see a true picture of how you are doing, you need to look at trends. You also will benefit from comparing your statement to companies in your same industry.

However, understanding what information is provided on the income statement and balance sheet is only part of the equation. To truly be able to use financial information to make better business decisions, we often need to look at numbers in relationship to each other. To do that, we need to consider ratios.

Ratios can tell you about the efficiency of your operation. The key is to pick out a few important ratios to track and review in your company. Some good ones to consider are: current ratio, which tells you the percentage of current assets versus current liabilities (this impacts your ability to pay your bills); days receivable ratio, which tells you the average number of days customers are taking to pay you; days payable ratio, which tells you the average number of days you are taking to pay your suppliers; and inventory turnover ratio, which tells you the number of times inventory turns over in a year (this tells you how well you are managing your inventory).

Remember what the statistics tell us—success can be tied to sound financial knowledge. Begin your road to success by learning to use your financial statements as the tools they are.

For business courses to help with financial management, visit www.missouribusiness.net/sbtdc/training and go to the finance offerings or contact the Small Business and Technology Development Center near you for personalized assistance.

- Rayanna Anderson, Director, Missouri State University SBTDC