So far, we have discussed setting your business up for financial success by building strong foundations, implementing good record-keeping and tapping into a better money mindset.

In our last article, we talked about the importance of regularly looking at your financial statements to feel more comfortable and in control of your numbers.

However, you may be looking at what appears to be a sea of numbers. It can be overwhelming to know what is important and why. There are so many financial terms that it's hard to know what they all mean and how they affect your financial health. And then there are the different financial statements - profit and loss, balance sheet, cash flow statement... where do you start?

Don’t worry - understanding and feeling in control of your financial statements is doable!

This blog post will give you a brief overview of each of these financial statements and make things clearer for any solopreneur looking to take their company to the next level!

We will talk about why the numbers alone do not tell the full story, what key performance indicators (KPIs) you want to look at, and how often you should be reviewing your financial statements.

How often should I review my financial statements?

This depends on a number of factors, including how often you generate financial statements and what your financial goals are.

As a general rule; however, monthly is ideal, while quarterly is the minimum that I recommend.

Reviewing financial statements at least quarterly will be enough to give you an accurate picture of where things stand with your business. However, a monthly review is a better process to keep on top of any issues or trends.

Types of Financial Statements

There are three types of financial statements that you can review.

The profit and loss statement (commonly referred to as the P&L) is one of two financial statements that are needed to understand how your business operates. It shows, on a high level, your revenue and expenses so you can determine your profit margin.

The other financial statement, the balance sheet, shows you what your company owns and owes at a given point in time.

Your cash flow statement is a financial statement that shows how much cash your company has taken in and paid out over time.

The financial statements should always be read and analyzed together. If you are using a software program, like QuickBooks, these statements can be easily prepared.

Three KPIs that You Want to Give Special Attention

Reviewing your financial statements sounds like a long, arduous task, but it really does not need to be.

At the very least, you want to look at the following three pieces of information:

Revenue
Gross Margins
Cash Balance

Revenue

Your revenue is usually the top line number on your financial statements.

It is important because it represents how much money you are bringing in during a given period of time, generally expressed as net sales (revenue minus returns).

Gross Margins

Gross Margins represent what percentage of revenue that actually gets into your bank account after costs like taxes and other expenses have been accounted for.

You calculate your gross margins by subtracting your cost of goods sold (COGS) from your net sales. This is your profit before you account things like administrative costs.

Cash Balance

Your cash balance is the number that represents how much money you have on hand. This can be found by taking your current assets and subtracting all of your liabilities, which includes things like credit cards bills owed to financial institutions.

It is key to know your cash balance - the amount of money you have available for use. Some businesses are paper rich and cash poor, and that can be a real issue when faced with unexpected expenses (i.e. emergency equipment repair).

BONUS: Operating Expenses

While it can be tempting to solely look at your sales figures, these do not tell the full story of your business' financial health.

We can imagine a paper cup that is riddled with holes. If you pour water into it, does the water stay in the cup? Of course not! No matter how much water you pour in, the cup will remain empty.

Likewise, our operating expenses may be draining our cup and so we need to keep a clear view of what those expenses are.

Making CEO-Level Decisions

Making choices for your business based on accurate data means you’re in the driver’s seat - a true CEO!

By knowing and understanding your financial statements, you can make better decisions about how to grow your business. You can identify issues quickly and nip any problems in the bud.

If you want to feel confident and in control of your numbers, look no further than our Money-Smart CEO course, opening soon! This self-paced course will take you through how to truly understand your money, and includes the support of a Facebook group of your peers and a strategy call with our team. To learn more about taking ownership of your role as a CEO, click here.

From Solopreneur to CEO: Understanding Your Financial Statements