5 Keys to Using Your Financial Statements

Food business financial statement analysis

Reviewing the financial statements for your food business are like having an annual check-up with your doctor: the goal is to pinpoint anything that might be a red flag or that might have changed from the previous year. However, the yearly check-up is not a replacement for taking care of yourself on a daily basis. It doesn’t mean that you might not get a cold during the year and need to see the doctor for that. It also doesn’t mean that if you aren’t feeling well or notice changes in your health that you shouldn’t address these with your doctor sooner. But, the annual check-up is a great way to make sure that nothing slips through the cracks that could lead to a potentially disastrous health situation. Financial statements act exactly the same way for business. In order to make the most of your statements as a diagnostic tool, follow these 5 guidelines:

    1. Follow a Schedule- you should review each statement at regular, specified intervals to catch changes and red flags with enough time to do something about them if necessary. There is such a thing as “too often” in reviewing your statements, so find the interval that works well for your operations and then stick to it.
    2. Aim for 100% Understanding- it is not good enough to understand 99% of what is on your financial statements; you need to understand everything. In my experience it’s the 1% that you don’t understand that will cause you the most problems. 
    3. Partner with your Accountant- if you don’t understand something or you’re not sure how to address it, enlist the help of your accountant. If your accountant doesn’t know, or isn’t willing to help you learn, then it might be time to find an accountant who is willing to act as your partner. 
    4. Look Into the Mirror- your statements should reflect back to you what you know to be happening in your business. The statements are backward-looking meaning that they shouldn’t tell you what you’ve done or what is happening, they should reflect back the business decisions that you have made during the period. If they don’t, figure out why. 
    5. Compare to Past Periods- looking only at the most current financial statements won’t tell you the whole story, you must compare them to prior periods so that you can see the changes in performance and financial health over time.

If you follow these 5 simple rules when analyzing your financial statements you will ensure that you are abreast of everything happening financially in your business and that you are in a position to address issues as they arise.