A business owner’s singular focus on revenue commonly results in false interpretations. Long-term prosperity requires management of risk. That process demands knowledge of all operational variables, including costs, assets, and debt.
Wise entrepreneurs differentiate themselves from the mass of people who respond to financial records with blank stares. Rather than seeing mere numbers on pages, a business manager visualizes an interconnectedness of various reports that paints a picture of current conditions. Here’s how:
1. Review reports: Accounting software has relieved business operators of the burden of compiling financial statements. Since these records simply come together when transactions are recorded, ignoring them is a strong temptation. Instead, the wise entrepreneur uses the time saved on this process to frequently examine financial reports.
2. Connect the dots: An Income Statement shows revenue and expenses. The resulting profit or loss carries over to Retained Earnings on the Balance Sheet. Profits producing positive Retained Earnings are offset on the Balance Sheet by increasing Assets. Knowing which of these was acquired with profits is crucial to uncovering where the money is going.
Losses or lower profits on the Income Statement reduce Retained Earnings. The Balance Sheet shows either fewer assets or higher debt. Frequent examination of the Balance Sheet allows business owners to identify what’s occurring in the relationship between revenue and expenses on the Income Statement. This examination provides the data needed for accurate interpretation and continued business success.