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Understanding financial statements for small business

If you are the owner of a small business, we will send you financial statements that provide valuable information about the financial performance of your business.

To understand the information and use it effectively, you should firstly look at the Revenue and Gross Profit for the year. An increase or decrease in the Gross Profit will provide an understanding of whether prices of the goods and services sold match the increase in costs of making the goods and services.

You should then concentrate on the financial position and read the balance sheet. The ratio between current assets and current liabilities is a measure of how well the business will be able to meet its debts in the next twelve months. If the current liabilities exceed current assets, then the business may require further funding from its banker.

The Cashflow Statement is a useful document indicating how the operation is funded. Whether the operations of the business funds the positive cashflow, or whether the borrowing of funds from the bank has provided the positive cashflow, or the sale of assets has created a positive cashflow. Conversely, Cashflow Statement can indicate that the business is running out of cash.

If the financial statements are audited it is also prudent to read the auditor’s report, and determine whether the financial statements have been ‘qualified’. This means that there is an issue that causes the auditor to question the value of an asset, or question whether all liabilities have been disclosed. Further the auditor may question the viability of the business.
The Notes to the Accounts are also important as they provide an insight into the story behind the figures.

Effective reading of financial statements will provide useful information to the small business owner on their own business or on potential businesses they may want to acquire. Working together with Saward Dawson is beneficial, helping you to understand your financial statements and consequently making well informed investment decisions.

Daniel Turcato

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