The 5 questions small business owners need to ask about their financial reports

If you’re trying to navigate your financial statements to understand the state of your business, asking your small business accounting professional these questions can help clarify the path you're on, where you want to go, and how to get there with the fewest road blocks.

Unless you've studied small business accounting, financial statements are likely a bit of a mystery-and understanding which documents tell you what can be a real challenge. One of the best ways to understand your financial statements is to take the time to talk through them with your accountant. Here are some questions you can ask to jump-start that conversation.

l. ls my business profitable?

This information comes primarily from your income statement (or profit & loss report [PLR]). Your profitability, or "bottom line," is reflected as your net income-which is equal to all of your revenues minus all your expenses. You'll mostly want to review how much you're making from the sales of your product or service (i.e., your gross profit) and how much you're spending in overhead to support your business.

2. Does my business have enough cash?

As a business owner, reviewing your small business's bookkeeping and wondering if you have enough cash to cover payroll and bills can cause sleepless nights. Familiarizing yourself with a few key items on your balance sheet can help you better understand your cash to find peace of mind. Your balance sheet shows you not only what your cash balance is on a specific day but also your accounts receivable (i.e., what customers owe you), accounts payable (i.e., what you owe vendors), and any other loans or liabilities. The CliffsNotes version: The short-term cash that you have to work with is cash plus accounts receivable minus accounts payable. Your accountant should be able to explain your working capital to you and whether it will adequately meet your business's short-term needs.

3. Are my statements prepared on a cash or accrual basis (and what does that mean)?

Cash basis financials only report activity that has actually been paid or received as cash. That means that they don't account for what's owed to you by your customers and what you may owe to someone else. Most financials are on an accrual basis, but cash basis tax reporting is common, especially for small businesses. Just make sure you know how your statements are presented-cash basis statements could be missing a lot of information that may impact your business decisions. If you want to know more about the difference between cash- and accrual­basis accounting, this blog post might help.

4. How much money do I have in the company, and how much can I take out?

Most business owners want to know how much money they can take out of their company without putting their operations at risk. First, review the equity section of your balance sheet to see how much cash has been left in the company from prior years (or how much ground you have to make up from unprofitable years). If your business has multiple owners, your accountant should prepare a report that breaks down the total capital for each owner. The amount of money you can take out depends on your goals for the business, but you'll generally want to leave enough cash in to cover three to six months of overhead or to fund upcoming large purchases.

5. Should my financial statements be audited?

Depending on the size of your business and who is using your financials, you may need to conduct a financial audit. The purpose of an audit is to get some assurance that your financial reporting fairly reflects the results of your business, so that you and others can rely on its accuracy. Smaller businesses can usually gain this confidence just by reviewing bank statements and making sure that the cash balances on the books reflect all of the incoming and outgoing bank activity. If you have any concerns about the reliability of your reporting, you may want to ask another accountant to review it to provide further assurance while curbing the need for a full audit.

Your financial reports can tell you a lot about what's working-and what's not-in your business. The great part is, you don't have to be an accountant to understand them-you just need an accountant who understands you.

When your small business is humming along, a solid, clean set of financial statements can help you ensure you're staying on track. However, many of Syzygy's clients are rapidly evolving and looking to invest in their next growth spurt. We love partnering with this sort of client-digging deep into their financials to identify what will help and what will hinder in leveling up their businesses.

If you're curious about what it's like working with third-party accounting services, you can read our blog post about it here.

What questions do you need answered about your business in order to overcome your barriers to success? We're here to help!

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