How to Read and Question Financial Statements Like a Pro: A Guide for Business Owners

As a business owner, you know your financial statements, operations, and historical data better than anyone. But even with a bookkeeper or accountant managing your numbers, it’s essential to stay engaged with your financial reports and ask the right questions. Understanding your financial statements at a deeper level helps you make informed decisions, spot potential issues early, and ensure your business stays on track. Here’s how to approach them like a pro.

1. The Three Key Financial Statements

Before diving into the details, it’s important to understand the three core financial statements your bookkeeper or accountant prepares:

• Income Statement (Profit & Loss Statement) – Shows revenue, expenses, and profit over a period of time.
• Balance Sheet – Provides a snapshot of your company’s financial position at a specific moment, listing assets, liabilities, and equity.
• Cash Flow Statement – Tracks the movement of cash in and out of the business, highlighting operational, investing, and financing activities.

2. Go Beyond the Numbers - Ask the Right Questions

You already have a strong grasp of your business operations. Use that knowledge to assess whether the numbers align with what you expect. Ask yourself and your bookkeeper:

• Are revenue and profit trends in line with my expectations? If not, what’s driving the changes?
• Are expenses growing faster than revenue? If so, are there cost-cutting opportunities or pricing adjustments needed?
• Does the balance sheet show an increasing debt load? Is it manageable, and what’s the plan to pay it down?
• Does the cash flow statement reflect a healthy business? Profitability doesn’t always mean positive cash flow. Ensure your cash position is sustainable.

3. Identify Red Flags Early

Working closely with your accountant or bookkeeper can help catch potential issues before they become serious problems. Some red flags to watch for include:

• Unusual revenue spikes or dips - Is the timing of revenue recognition accurate?
• Unexplained expenses or losses - Are there transactions that don’t make sense or require more explanation?
• Poor cash flow despite strong profits - Are customers paying on time, or is money tied up in accounts receivable?
• Inventory buildup or rising accounts receivable - Is your business struggling to convert sales into actual cash?

4. Leverage Your Bookkeeper or Accountant’s Expertise

Your bookkeeper or accountant isn’t just there to record transactions; they’re a valuable resource for financial insight. Engage with them by asking:

• What financial trends should I be aware of?
• How do my numbers compare to industry benchmarks?
• Are there tax-saving opportunities I should be considering?
• What do you see in my financials that I might not have noticed?

5. Use Financial Statements to Drive Decisions

Your financial statements should be more than just compliance documents; they should guide your strategy. Whether it’s setting revenue goals, adjusting pricing, managing expenses, or planning investments, make sure you’re using your numbers to make proactive decisions.

Final Thoughts

As a business owner, you don’t have to be an accountant, but you DO need to stay engaged with your financials. Your bookkeeper or accountant is there to support you, but you know your business best. By asking the right questions and using your financial statements as a decision-making tool, you can ensure your business remains financially strong and positioned for growth.

Need help making sense of your numbers? Have a conversation with your bookkeeper or accountant to gain deeper insights and clarity!