Using financial statements to make informed business decisions

In the dynamic entrepreneurial landscape, making informed decisions can be the difference between thriving and struggling as a small business owner. The key is understanding your financial statements—comprising the balance sheet, income statement and cash flow statement—which provide a glimpse into your business’ financial health. If you look beyond the numbers, you can glean insights into trends that can inform your business’ path forward.

Trends

Growth indicators

• Consistently increasing revenues over time
• Expanding profit margins, indicating efficiency and pricing power
• Improving cash flow, with consistent or increasing operating cash flows
• Rising customer acquisition rates or expanding market share
• Increasing asset turnover ratio, suggesting effective asset utilization
• Healthy debt-to-equity ratio, showing a balanced capital structure
• Positive trends in key performance indicators aligned with business objectives
  

Struggle indicators

• Declining revenues or stagnant sales growth
• Shrinking profit margins due to increased expenses or pricing pressure
• Cash flow problems, such as declining cash reserves or inconsistent cash flows
• Decreasing customer retention rates or loss of market share
• Deteriorating asset turnover ratio, indicating inefficiencies in asset management
• High debt-to-equity ratio, signaling excessive debt burden and financial risk
• Negative trends in key performance indicators falling short of business objectives
  

Understanding these trends allows you to notice what’s working while proactively adjusting how you deal with what’s not.

The future

Planning five years out demands discipline and foresight rooted in financial analysis. By extrapolating current trends, you can anticipate challenges and opportunities for your business. For instance, if your sales are steadily growing, maybe you need to plan for hiring and expanding your team or operations. But if your expenses are outpacing your revenues, you’ll likely have to implement cost-cutting measures or diversify your revenue streams.

How can you use the trends you notice in your statements to create a five-year plan?

• Analyze trends: Study long-term trends like revenue growth, profit margins, and market dynamics from your financial statements. Look for patterns over time, what’s driving them and how they align with your business goals. What areas are performing well and which ones need improvement?
• Set goals: Establish specific objectives aligned with your business vision, considering where the trends suggest growth or challenges. These could include revenue growth targets, expense reduction goals or profitability benchmarks. Align these goals with your overall business strategy to ensure coherence.
• Manage risks: Assess external factors such as economic trends, industry shifts, regulatory changes and competitive pressures, and develop contingency plans to address these risks.
• Invest wisely: Allocate resources for growth opportunities—whether it's investing in new equipment, creating new products, expanding into new markets, trying new technology or developing talent—and capitalize on emerging trends while optimizing operational efficiency to support sustainable growth.
• Diversify revenue: Explore new markets, customer segments, product lines or distribution channels to broaden your revenue base while reducing vulnerability to market fluctuations and dependence on single sources. Diversification can enhance stability and sustainability over the long term.
• Monitor and adapt: Regularly track progress, identify any deviations from your plan and make necessary adjustments based on performance metrics and market trends. Project how changes in your operations, market conditions or economic factors may impact your finances. What’s your trajectory?

Strategic decision making

How will you leverage data to make the decisions that will impact your business’ sustainability in the future?

The key is aligning your financial choices with your broader business goals and values. For example, investing in sustainable practices not only benefits the environment but also enhances brand reputation and attracts socially-conscious consumers. By integrating financial considerations with strategic vision, you can cultivate growth while remaining resilient.

Financial ratios serve as powerful tools for decision-making. Take the debt-to-equity ratio, for example. This number provides insight into your company's financial structure and risk profile. A high ratio may indicate that your business is heavily reliant on debt financing, potentially increasing financial risk, while a lower ratio suggests a healthier balance between debt and equity, signaling stability.

But, deciphering financial statements requires more than just number crunching. Seeking guidance from financial experts—like your accountant, business coach, or ATB’s business advisors—can help interpret data, identify key performance indicators and offer strategic insights tailored to your goals.

Recap: Long-term success

Understanding the data within your financial statements is not just an exercise in number crunching—it's essential for your success.

The insights you glean empower you to make informed decisions that drive growth, profitability and sustainability, position your company for long-term success and navigate challenges with confidence. Ultimately, it’s about ensuring your decisions are data-driven and support your long-term goals.