How to Read Financial Statements

By Merle T. Northrop, Flatiron Ventures, Inc.

Part 3 of 3 – Reviewing Financial Statements

Merle Northrop

After the Income Sheet (featured in the previous issue of NewsLeaf), we move to the reviewing Financial Statements.

When should the business owner review the business financial statements and what other reports are useful to review?

The financial statements should be “mostly” ready by about the 5th of the following month. With online banking, the bank reconciliation can be completed soon after the last day for the month, so that is no longer an excuse for the statements to be delayed. I believe that neither the Balance Sheet nor Income Statement should exceed two pages. With too much detail, you can get lost and miss the big picture. Start from the big picture and drill down when you find areas to explore.

When reviewing the statements, be sure to have the bank reconciliation in hand with the Balance Sheet. Have your Critical Factor data available (as described in my last article) and compare it to sales or whatever other line item it relates to. Have some prior period statements available for other comparisons as well, such as same month, prior year.

Who should be involved in the financial statement review?

It needs to be understood that the financial statement review is confidential to the people present and not ‘public’ information. It’s a privilege for each person to be included. These people may include:

  • Key managers who have authority to spend or direct sales
  • Accountant and/or bookkeeper to answer questions that arise
  • Department heads if you departmentalize your financial statements
  • One or two key employees could be involved for a smaller company
  • If transitioning the business in the future, that person should be present

I like to see the financial statement meeting occur each month and not last more than 1-2 hours. Allow free discussion from the people you’ve selected to be present. It’s interesting to see the ideas that develop when group members are included in these discussions. I like early in the week for the meeting so action can be taken right away. First thing in the morning if it works, but sometimes that interferes with dispatching work. The time needs to fit for everyone involved.

Someday when you are considering selling your business, you will need these statements, so keep them by month/year in a binder or file that you can easily access. When you have a conversation with your business broker, he/she will want copies of some statements, as well as your tax returns from several prior years. Most of us brokers like to reconcile the internal statements and the tax returns to confirm that all tax entries have been entered into the internal statements.

Merle T. Northrop

Flatiron Ventures, Inc.
1600 38th St., Suite 203
Boulder,  CO  80301 303-440-6141