Become very familiar with your balance sheet. A balance sheet shows where your business stands at any particular moment. A profit and loss statement (also called an operating statement) totals the result of operations over a selected time period. Each statement is merely a collection of figures. However, with proper interpretation and evaluation, this collection of figures becomes an important indicator of how financially successful the business is at this time. Financial success is the end result entrepreneurs seek. Understanding the balance sheet and the implication of the financial results it reveals are valuable tools in making operating decisions that will impact sales, expenses and profit.

The single balance sheet is like a snapshot. It measures the condition of the company at a single moment in time. The balance will show how the capital within your business is distributed. The amount of capital distributed over the various accounts in the business and the surplus of assets over liabilities shows profitability. If the snapshot shows that liabilities are greater than assets, you then see a loss position for the company at that time. Even more important are trends over time. A company may have a month with high expenses that result in a loss. However, the trends may show five months of profitability. The net effect of the six months may be profitable, even though one month showed a loss. The concern is if three months show a loss, then the owner must decide how to overcome the negative cash position.

Compare balance sheets over a period of time to gain an understanding of your assets and liabilities. Let’s say you review your quarterly balance sheets over several years. By comparing these on an item-by-item basis, you can spot trends. You are now gaining a real understanding of the overall financial structure of the firm. For example, larger quantities of merchandise on hand from one period to another may be a reflection of that decision to buy ahead because of continuing inflation. Receivables may show a continuing upward trend when collection of outstanding accounts is not pushed for collection within 30 days. Debts may run higher when the firm expands or makes capital improvements. This information provides management information, to help the owner make decisions about the prudent and fiscally sound operation of the business.

The profit and loss statement is another valuable tool in ascertaining the company’s performance for a given period of time. The statement will show sales volume, cost incurred and the amount or profit or loss. Comparing the profit and loss statements of success periods monthly or quarterly can be very revealing. Why was there a lower gross profit for each of several quarters? Did price cuts decrease per sale profitability? Was a higher proportion of sales spent on operating costs such as personnel, rent or insurance? Are overhead costs increasing routinely?

Although, your accountant should be able to give you advice and guidance, you should also have a clear understanding of how to read, interpret and act on financial information. As the decision maker, you need to know what effect decisions have exerted on profit in the past and what decisions need to be made to control costs, increase profitability and improve cash flow. The flow and use of money in your business is critical. Your salary and the continued profitability of the business depend upon you and your ability to make sound financial decisions.

If you would like information on how to read and interpret financial data, contact the SCORE® Association (Service Corps of Retired Executives). SCORE® provides free and confidential, small business counseling and mentoring to entrepreneurs. SCORE’s volunteer, business counselors have assisted more than 3.5 million entrepreneurs. For a referral to the SCORE® chapter nearest you, call 1 (800) 634-0245.