What To Do With These Financial Statement Red Flags

As a business owner, you need to take the time to review your financial statement. While you may not possess an uncanny ability to spot red flags in an instant, gaining a basic understanding of your financial statements is enough. This way, you will easily identify any discrepancy that can create a negative effect on the financial health of your business.

Incomes that are non-operating

If you want to earn the trust of your creditors and investors, they need to see consistent income in your financial statement. The income must be from continuing operations. However, if income is obtained from other sources such as one-off sales, gains from the sale of investment and gains from the sale of fixed assets, this should be a cause for concern.

These revenues are considered non-operating and may not be valuable because the possibility that this revenue will not reoccur is strong. You can identify non-operating income as it is stated separately from operating income. It is found on the income statement. If the operating income decreases, this only means you should double your efforts into revenue sources that will not disappear.

Low Cash Flow Patterns

A profitable business does not mean having enough cash. A company needs to make sure that the cash is also flowing into the business to gain the confidence of investors. If you are falling behind your loan repayments or not collecting receivables quickly, it only means that you have poor cash flow patterns. When it comes to spotting cash flow patterns, pay attention to net income. If the net cash flow is low compared to net income, this can be another sign of a financial crunch.

Fixed Assets Disposal

It might be necessary to sell equipment every once in a while especially when it is not performing well, but if you used the cash for short-term expenses or to pay your debts, this can be a warning sign. The only exception is when the proceeds are reinvested into the business. Disposals of fixed assets can be an obstacle to your operating revenue. Disposals are found on the balance sheet. It is necessary for a business owner to be aware of the reason for selling the fixed assets. The disposals need to be significant and that said, an explanation of the reason for selling the fixed assets must be prepared.

Increasing Inventory

An increasing inventory may mean two things: you are expanding your offerings or you have products that are not selling. If the latter is the reason for the increasing inventory, there is a higher risk of spoilage. Make sure your inventory percentage is not higher than the prior years as this only denotes that you still have some inventory sitting on your shelf.

What You Need To Know About Cash Flow

Even the most profitable companies can go broke if they fail to manage cash wisely. In running a business, cash is critical and it is not about generating profits. When you think about how much it would cost to make the product and what the company can sell it for, profits will surely come to mind. Profits are not tantamount to cash asĀ  you do not spend them in a business. You spend cash. If you do not have enough cash to pay your expenses, you can put your business at great risk. Your working capital determines your business health. It is important that you have a proper business plan that enables you to become well-prepared in managing your cash and profits.

1. Sales do not determine a steady cash flow.

Even if you are making the sales, it does not necessarily mean that you have the money to pay the expenses you incurred. If you incur the expense, assuming that you have already made a payment for them can get your business into trouble. Inventory is often bought, paid and stored until customers purchase it hence it becomes the cost of sales.

2. Generating profits do not mean you have enough cash.

Bills cannot be paid with profits. Even if you regularly pay your bills and your customers don’t, it can still take its toll on your business. Even if you are making profits, you still cannot make any money from it.

3. Inventory can hurt your cash.

It is important to note that you need to build or buy your product before you can even consider selling it. Even if your products sit on your shelves, the suppliers are still expecting to get paid. This means the dollar you have in inventory is a dollar you do not have in cash.

4. Bankers do not like surprises.

It is necessary for you to plan ahead so you are well-prepared if a problem arises. If you go to the bank armed with a realistic plan and chart, the bank will have an idea of the financial health of your business. If ever you intend to take out a loan, the bankers will use the reports as basis for their decision. `With a steady cash flow, it will not be impossible for you to get an approval from the bank.

Being aware of these cash flow rules will enable you to make room for business growth. Due to the nature of cash flow, you will not grow complacent even if your business is generating profits.