Earning a profit is likely high on the list of things you want your business to accomplish. To determine if you are actually earning a profit requires knowing a lot more than just how much money you brought in that month. Determining profit means looking at things like the company’s assets, expenses, income and equity on a regular basis. These should all be reflected on your company’s statement of financial performance, which documents all areas related to finances so you get the big-picture view of where your company stands.
A statement of financial performance is an accounting summary that details a business organization's revenues, expenses and net income. Three financial statements comprise the statement of financial performance: income statement, balance sheet and cash flow statement.
Income statement: The income statement reflects a company’s revenues and expenses. It shows the company’s bottom line so you can see how profitable your company is during a certain period of time, such as quarterly or annually. The statement of financial performance takes into account sales revenue, cost of goods sold and other operating expenses and income.
Balance sheet: The balance sheet reflects where your business stands financially at a certain point in time. This statement of financial performance takes into account assets, liabilities and shareholder equity to make sure assets are equal to the other two factors. The balance sheet incorporates the net income determined on your income statement.
Cash flow statement: The cash flow statement looks at how money moves through your business. It shows increases and decreases in cash from operations, investing and financing during a period of time. This statement of financial performance shows the net change in cash balance using numbers from both the income statement and the balance sheet.
These statements are prepared monthly, quarterly or annually, and give businesses a big picture of there they stand financially. A corporation's accounting department may prepare a statement of financial performance at any given point in time or throughout the year, depending on business requirements. For example, you may ask your accounting manager to prepare a statement of financial performance for the last two weeks of July and the first three weeks of November to understand what factors affect sales and whether sales are seasonal.
Preparing a statement of financial performance means knowing a lot of important information about how money comes into your business and how it goes out. These financial performance factors for a business should be tracked regularly:
Assets: An asset is anything your business owns or has that will be of value in the future. This includes tangible assets such as products, buildings and equipment. It also includes intangible assets such as contracts, marketing and consumer mailing lists. These are all things that can be sold in the future that would add value to your company.
Liabilities: A liability is anything you might owe in the future and is often based on a contract. For example, if one of your employees crashes the company car, you may be liable for paying the car’s insurance deductible since you contract with the insurance company.
Equity: Equity is the value of your business that remains after deducting liabilities from assets. In corporations, this value is known as the shareholder’s equity.
Owner investment: Business owners typically invest their own cash and resources into the business. This is known as the owner investment, which establishes equity in the business. If future business partners want equity in your business, how much they invest determines their equity share. For example, a limited liability corporation, or LLC, with two equal partners who contributed 50 percent has an owner investment of 50 percent of the business.
Owner distribution: If those partners later sell their shares, they would receive an owner distribution. This results in decreased equity in the business.
Revenue: Revenue represents income that a company earns during a certain period. It includes sales, interest income and gains on short-term investments. Revenue may be a short-term item if it is earned in a year or less or a long-term item if it is earned after a year. For example, a business’ short-term revenues include sales and interest income, while long-term revenues can include interest income, such as from a corporate savings account, that is earned in two years.
Expenses: Expenses represent costs that a company incurs during a certain period. They include the cost of sales, interest expense, production or delivery costs, as well as losses on short-term investments.
Gains and losses: These are increases and decreases in equity that result from transactions incidental to your business. For example, if your primary business is book printing and distribution, you likely have machinery needed to bind books. If you sell a book binder used to manufacture books, you would sell it either for more than you paid for it (a gain) or less (a loss).
A statement of financial performance can also include comprehensive income, asset use, market share and other factors that affect your business.
There are many reasons why businesses need a statement of financial performance. Generally, a statement of financial performance is important to understanding if your business is profitable and, if not, where to make needed changes. It shows the current financial status of your business, how cash is used and where the unnecessary costs are.
A statement of financial performance allows a company's top management to identify major revenue and expense items that affect the company's bottom line, or net income. For example, you can review your company’s statement of financial performance for the months of June, September and November to understand and compare sales revenue levels and which expense items increase based on seasonal business demands.
The statement of financial performance also helps management see which business segments or products are worth investing more money in and which the company may need to stop putting money into. If you're investing a lot of money in a product that historically costs more to produce than it earns profit, you can make the best decision for your company based on information learned from the statement of financial performance.
A statement of financial performance also provides significant insight into an organization's overall profitability. It helps investors, lenders or regulators gauge a corporation's economic standing. This comes into play in such situations as seeking a bank loan. The bank's credit officer may review your statement of financial performance over a five-year period to gauge profitability levels or sales trends and ensure that you will have available cash to repay the loan.
Potential investors look at your statement of financial performance to help them decide if they want to invest in your company. Likewise, someone wanting to purchase or acquire the business will use the statement of financial performance to help determine a purchase price. When done properly, the statement of financial performance tells future investors or purchasers everything they need to know about your company.
While only publicly traded companies are required to maintain statements of financial performance, keeping track of your company’s finances will help you when it comes time to file tax returns.
After all of the calculations are in, you may find that the statement of financial performance isn’t showing the profits you expected. This can be disheartening to anyone who invests a lot of time, energy and money into their business enterprise, but there are ways to improve the financial performance of your company:
- Maintain ongoing financial statements. One of the best ways to improve financial performance is to regularly review how your business is doing. Instead of preparing the statement of financial performance annually, you may want to do it quarterly, or even monthly, to see where improvements can be made. What you don’t want to do is make rash decisions based on one bad month, so be sure to look at financials month-to-month, quarter-to-quarter or year-to-year to make the most informed decisions.
- Be proactive. With regular financial performance statements, you can see if things are operating as efficiently as they should. With ongoing financial statements, you can get a sense of what is currently happening in your company, what is going to happen, and if any changes need to be made. Being proactive can save you a lot of money and positively impact your bottom line.
- Have a realistic budget. One of the quickest ways to improve financial performance is to have a realistic budget. Don’t spend a lot of money in areas that don’t make sense, since it will negatively affect your bottom line. Make sure you have a budget that is realistic and in line with company goals. When you work within that budget, you may see the financials move in the direction you want.
- Price your products correctly. Know how much your products are actually worth on the market by doing competitor research. If you can increase the price of your product or service, you may be able to see immediate improvements in the company’s financial performance, especially if costs stay the same.
- Set achievable goals. In addition to a realistic budget, make sure your goals are achievable. Don’t try to provide services you don’t have the resources for. Don’t try to double your profits within one month. What you want to do is strategically plan where to invest resources and money, and then set goals that the company can actually achieve. Meeting smaller goals helps improve financial performance in the short-term, while ultimately meeting your long-term financial goals.
- Get everyone on board. Make sure your entire team is onboard with the budget. This ensures they abide by how much to spend and when to cut their losses. It also ensures that your team is engaged and committed to your company’s goals and bottom line. Satisfied employees can boost your financial goals since they are more likely to do what it takes to help your company succeed and stick around for the long-term.
- Make sure your systems are current. Your company is only as efficient as the people and technology you employ. Outdated technology and systems can slow things down so much that you waste both money and time. Periodically check in with your staff to make sure they are making effective use of their time and efficiently processing anything related to your company’s finances, such as invoices and collecting overdue payments. Keeping the computers and software up to date will also keep things operating more smoothly. Utilizing financial performance apps and newer computer programs is key in today's fast-changing world.
Take time to review your company’s financial statements to see where you can make changes to improve its financial performance. You may be pleasantly surprised by the results.