As kids, we used to keep record of our pocket money and tried to make the best use of the petty cash we used to receive from our elders. But as we start growing financially and in age, this perspective starts to blur out from our vision. We become extremely short sighted about how our asset-liability mix should be balanced. To put it simply, we start ignoring the value of assets we hold in comparison to what we owe in the market. Here’s when the inevitable role of financial statements comes into play.
It is often said that a person’s financial statements is the window to their sound financial health and status.
Sure there are many ups and downs in business but if your financial statements are consistently showcasing a downfall, then there is a definite need to be concerned about it as they just don’t portray a very good sign in front of your shareholders, board members, investors both existing and potential. So if you haven’t paid much attention to your balance sheets and income statements yet, it is time that you start looking at them with utmost sincerity.
While some business owners feel that certain aspects of their business require or demand more time than reading a balance sheet, some do not feel it is important enough. The rest of them either lack the adequate knowledge and training required for the purpose or just find it too difficult to interpret their balance sheets and cash flows. In such a case they can regularly check with their accountants and tell them to explain the whole financial picture of their business in layman terms that is both easy to interpret and understand. If this doesn’t work then it is also advisable to take help of the vast pool of information available all over the internet, as there is no age or time to learn something new and add to your knowledge base.
Some easy ways to improve your financial statements are:
- Keeping your debt equity ratio in line with the industrial benchmarks so that your debts are maintained in proportion to your capital.
- Maintain working capital throughout the year. More than required working capital will depict an inefficient use of your investments whereas low working capital would keep you in danger of getting insolvent due to low liquidity.
- An upto the mark goodwill will keep your creditors less concerned about running into bad debts, which in turn will keep your creditor turnover ratio low
- Be consistent in valuing your assets and liabilities at the end of financial year.
- Keep provisions for any contingent liability that you foresee in future to maintain your operational efficiency.
Small steps in the right direction can often take a person high up on the success ladder and even add value to their business. Like charging is essential to any battery for its proper functioning, so is the case with your financial statements, as they too need regular and periodical reviewing. If the review is positive, it will act as a motivator for you to move in the direction of success while if you get a negative review, it can act as a warning and would indicate where your decision-making went wrong as sometimes a tiny loss in your balance sheet can foretell a huge potential risk.