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  2. Financial Statements & Business Growth: What’s the Connection?

Financial Statements & Business Growth: What’s the Connection?

Just like a report card or a dashboard, a financial statement provides an at-a-glance overview of key financial information. Submitting a financial statement is compulsory for any incorporated company to remain audit and tax compliant, so why not make the most of this process? You can rely on your financial statement as a tool to grow your business and give you an edge when it comes to deciding on what’s best, attracting investors or even securing that business loan you’ve been after.

Let’s explore that in a bit more detail.

As a business owner, why should I care?

Think of your financial statement as a stepping stone that can help you get from where you are, to where you want to be. Consider you run a small marketing business from an office in town, where you pay monthly rent. If your goal is to set up another office in a different location in 2 years time, you can look at your financial statement to work out how much extra profit you’ll need to make to cover that additional rental in the timeframe you’ve designated.

Analysing your net income and cash flow while looking at past trends may also help you see opportunities for optimisation. Perhaps you notice it’s best to buy your bulk office supplies stock at a specific time within your fiscal year that won’t reflect negatively on your cash flow statement?

As a company director, you’re ultimately responsible for your financial statement but while you’re focusing on growing your business, you can offload the accounting services for the financial statements you’re legally obliged to and even get a dedicated bookkeeping team on board to help you along the way.

What’s included in a financial statement?

To build your business over time, it’s important to get a holistic view of your company’s finances. Here are 3 main components that make up a financial statement:

Income statement shows if you are making money. It includes all your revenue and expenses as well as your net income, which shows if there’s something left once you’ve deducted your expenses.

Balance sheet shows how much you own and how much you owe. It is a snapshot of the risk, businesses’ equity, assets and liabilities at a specific point in time.

Cash flow statement indicates where your money goes, and where it’s coming from (usually indicating whether a company makes enough money to cover operating costs)

How often should I prepare, and check, my financial statements?

Along with a financial statement for your company’s fiscal year (a consecutive 12-month period, usually determined by your company’s incorporation date), you can also opt to prepare interim financial reports every 1 to 3 months. This means any decisions you need to make can be made based on the most recent available financial information.

How can a financial statement analysis help grow my business?

Let’s explore practical avenues for business growth and how they can apply to you.

Perhaps you want to get more investors on board? Maybe you’re expanding your services and want to grow the business through a loan? It could be that you need to focus more on the business administration side of things and need to find the perfect candidate to take over what have been your day-to-day responsibilities?

Though every business is different, the approach is often the same. Let’s use an example of a boutique furniture store to unpack the relationship between understanding how to read your financial statement and fostering business growth.

Invest in the right assets

The furniture workshop goes through 3 hand saws every month, each costing HK$1,000. An annual review of your financial statement gives you the opportunity to see that an expense like this (which could be overseen in monthly reports) is costing you HK$36,000. What if you shopped around and found an alternative, automatic saw with a stronger blade that would cost a bit more short-term but last much longer?

Get the loans you need

Your furniture shop was featured in a local magazine, which caused a buzz of popularity. You realise that you’ll need a short term loan to get hold of the resources to meet your immediate stock demand and still cover your day-to-day expenses and overheads. If your financial statement shows your business is well managed and turning a profit, it signals that you’re more likely to honour a loan from a bank or creditor.

Keep on top of your taxes

Perhaps doing inventory checks can get a bit cumbersome and having a tablet could help you be more efficient? Along with a true and correct report of your income, your financial statement gives a clear overview of any expenses. You’re also able to write off any small business tax deductions, which will save you money overall. If you’re vigilant you could set aside that money to purchase equipment like that tablet to enhance your productivity.

Financial statements & future planning

Remember that financial statements only demonstrate what your company has achieved in the past (i.e they don’t predict future performance). They’re able to provide a wealth of historic information over a specific time period or time frame — usually monthly, quarterly or annually. One of the benefits of this, however, is being able to look at past trends (by analysing your net incomes and cash flow) to get a sense of what you may need to do in order to continue to grow your business.

Perhaps there’s one specific chair that’s incredibly popular in your furniture store. Just by looking at your income statement, you can see it has a big profit margin. With that knowledge, you can spend more money and time producing that piece which will mean more long term gains.

What else does a financial statement tell me?

Here’s a quick overview of some ratios that give a better understanding of how your financial statement is reflecting the state of your business (past efficiency, stability and company profitability):

  • Profitability margin shows whether your business can generate a profit for every Dollar of sales.
  • Solvency ratio is a good indicator of the stability of your business is your debt-to-asset or debt-to-equity ratios. If your solvency ratio isn’t great, it’s a red flag that your company may struggle from cash flow problems.
  • Efficiency ratios refer to the speed at which you can turn your goods into sales — i.e the speed of goods sold to inventory.

Financial statements & Hong Kong: Requirements for submission

If you’re an incorporated company in Hong Kong, there are certain reporting regulations you’re expected to follow year-on-year when you’re submitting a statutory financial report. The submission of this Audited Financial statement should be accompanied by a signature of a Certified Public Accountant (Practising).

Need more detail?

For more information, you can take a look at the official Inland Revenue Department’s website.

A quick summary for business owners

It’s important to empower yourself with the fundamental financial knowledge you need to contain your costs, increase your profit margins and make the best decisions for your business growth.

After all, it is your future that you’re looking after!

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