Review financial statements to assess your organization’s sustainability

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So just how important is it to page through that monthly financial statement? Very. CEOs are not only the visionaries of their companies, but they also need to have a working understanding of the financial issues facing their organization.

The key to keeping current with your company’s financial position is to know what to look for. In fact, if you commit just a half-hour to reviewing these top five items each month, you’ll have the information you need to assess the sustainability of your organization.

1. Are the internal financial statements timely and are they accurate?

The information contained in your financial statements is only useful to management if the financial statements are prepared accurately and distributed in a timely manner. If the company’s year-end statements are audited or reviewed by an independent CPA, the volume and magnitude of adjusting journal entries is a good indicator of whether the monthly internal financial statements are reliable. The CEO should be interested in knowing if the operational managers are routinely getting the financial data they need on a timely basis.

2. Are we on track to achieving our revenue goals?

Reviewing the “top line” of the income statement is an important beginning to evaluating the financial performance of any business. This will give the CEO an immediate impression of whether the current strategy of providing goods or services is effective. Comparing the revenue result to current budget and prior actual year is a good gauge of whether the company is trending positively in revenue growth.

3. Are we generating “quality” revenue?

This question can be best answered by reviewing the “middle line” of the income statement, commonly referred to as gross profit. Revenue minus the direct cost of goods and services sold (generally material costs, direct labor costs and other manufacturing or service related cost) results in the gross profit margin for the business. Reviewing the gross margin, both in terms of gross profit dollars and gross profit percentage, is a very important indicator of whether the overall revenue streams are producing profitable business results.

4. Are we performing at the bottom line?

The ultimate measurement of financial success is whether the business is producing sufficient profits at the bottom line in the form of net income. This takes into account the expenses incurred in the areas of selling, general and administrative expenses and interest expense. Income taxes would also be included as an expense for businesses operating as C-corporations but not for “pass-through” business entities including S-corporations, LLCs or partnerships. The ability of the business to generate sufficient net income on a sustainable basis should be of primary concern to the CEO.