A guide to reading a financial report

Reading a financial report helps you determine the strength of your business.

Are you planning to grow your business? Do you want to get additional investors? Before you can execute your plans, you need to pry into your financial report to find out if you are indeed ready to take the next step. If you are informed about the financial performance of your business, you can plan ahead and be ready for any changes that may take place.  While it does not take rocket science to read a financial report, there are things you need to keep in mind when going over your financial statement.

Be in the right mindset

While it is not difficult to read a financial report as you only have to focus on the essential information such as the income statement, cash flow statement and profit and loss statement, you still need to get in the right frame of mind. There can be times when you may not like the information such as near-zero cash balance. This is a serious problem that you need to deal with. Be sure that you are ready to tackle this problem.

Focus on the most essential information

You can be bombarded with a plethora of information that everything may seem confusing especially when it comes to checking the trend charts, historical summaries and much more. Do not stress yourself reading the financial report. Focus on the information you need to obtain. If you want to read the highlights section, focus on that section and do not let other information distract you. There are businesses that provide both detailed and condensed version of the financial reports. If you wish to not spend too much time going over a financial report, you can choose the shortened version. However, investors still prefer to get more information so detailed annual reports in this case, are the way to go.

Know the performance of your profit

There are many ways a business earns profit such as making sales. It is important that you analyze your profit performance by checking your sales revenue. Is your sales revenue higher or lower compared with the previous year’s? Can you tell the gross margin ratio of your business?

Identify any unusual gains and losses

You may not easily identify any irregularities on your financial report unless you dig deeper into it. It may be safe to assume that these things happen once in a super blue moon, but the truth is, they can hurt your business if left unchecked. There should not be any unusual gains and losses in the first place because this only means that there are loopholes in the process.

Compare cash flow with profit

The primary objective of a business is not just to generate profit but also to get a steady stream of cash flow from making profit. Cash flow generated from making profit is considered to be the most important stream of cash inflow to a business. There are many ways you can generate cash such as selling off some assets or borrowing money. However, cash flow from making profit is the most important.