Understanding financials key to controlling your business

ROCK ISLAND, Ill. — Financial statements are like GPS for businesses.

“You can’t understand or control your business without having a handle on your finances no matter what industry you are in,” said Morgan Falconer, certified public accountant and owner of Falconer Financial Consulting LLC.

Using financial information correctly helps people make decisions.

“It will help you avoid cash-flow issues which can turn into bigger issues and help you understand your profitability,” said Falconer during a presentation at the Women in Agriculture Conference organized by several Illinois county Farm Bureaus.

“You can’t be in business for long if you’re not making a profit,” she said. “Finances are not just for people like me. You need to know as an owner.”

The three main financial statements are the balance sheet, the income statement and the cash-flow statement.

“These three statements tell you the same story with a different lens,” Falconer said.

The balance sheet indicates what a business owns and what it owes.

“It is a snapshot of a point in time. It is a poster of your financial health,” Falconer said. “It looks at your assets, your liabilities and your net worth that you have to run your business.”

On the assets side of a balance sheet, the CPA said, “cash is king.”

“You have to understand where your cash is going,” she said. “Inventory is almost as important as cash to understand how your inventory is structured.”

The most important number on a balance sheet is the net asset or equity.

“That number cannot continually go down for you to sustain your operation,” the CPA said. “It can go down one year or maybe another year, but over time that number cannot go down.”

One of the biggest red flags on a balance sheet, Falconer said, is a negative number.

“It might be a short-term issue, but if you continue to burn through cash, I am extremely concerned,” she said.

“Another red flag is anytime you have growing debt without a corresponding growth in assets, because that is not sustainable either,” she added.

An income statement shows the performance of a business over a period of time.

“It includes what came in, what went out and the net profit,” Falconer said.

“The key components on the revenue side are sales and rental income,” she said. “On the expense side, look at your people expenses and supplies.”

Falconer examines if the expenses are growing faster than the income, as well as if this is a pattern or just a one-time event.

“Look at the biggest costs to run your day-to-day business because knowing that is really important,” she said.

For the cash-flow statement, Falconer evaluates if the business is putting its cash to work.

“If you are not putting your cash to work, you are potentially leaving money on the table,” Falconer said.

“I love to see a diversified investment strategy, but it will look different depending on what you are comfortable with,” she said. “But taking no risk is risky.”

When looking at a cash-flow statement, business owners should evaluate if financing makes sense.

“Think about if you are borrowing too much and spending too much on interest,” Falconer said. “On the investing side, decide if you are investing enough or too much.”

Liquidity is important for a business to be able to access cash when necessary.

“However, you do not want to be holding onto too much — it is a delicate balance,” the CPA said. “It’s about strategy and structuring your assets to work for you the best way you can.”

Falconer encourages all business owners to know their bank partners well.

“If you don’t have a relationship manager, get one,” she said. “That is one of the most missed opportunities. Chances are they will have something that can help you.”

When making a business decision, Falconer encourages people to look at multiple periods of data, especially if something happened in a particular period that is not a regular, recurring situation.

“The most common mistake is just looking at profit and ignoring everything else,” Falconer said.

“Review your financials monthly if not more,” she said. “Compare them to prior years. I go back five or six years.”

Farmers should focus on trends and look for patterns.

“There are so many things you cannot control year to year,” Falconer said. “If it is a pattern, it is likely something you can control and tackle.”

Business owners do not have to be an expert.

“But you need to know who to call when you do need an expert,” Falconer said. “Perfection is not real. I strive for consistency and use the resources you have to help you.”

“If you understand your financials, then you are in control of your business,” she said.