Business tips for food manufacturers – part 1: Financial statements
Understanding your financial statements and ratios will help empower you in making decisions. It also allows you to assess whether your food manufacturing business can support new debt.
Cash in the bank doesn’t tell you if the operation was profitable in the past fiscal period.
In Part 1 of this article, we’ll walk through the 3 financial statements that will benefit you most when managing your business. Once you’ve read this, move on to Part 2 - financial ratios.
Before we get started, let’s review a couple of methods for tracking finances: accrual and cash accounting.
Accrual vs. cash accounting
For a financial analysis that involves income and expenses, use accrual accounting rather than cash accounting.
In cash accounting, you only record income or expenses when you pay or receive money. With accrual accounting, you record income and expenses every time you get bill or submit an invoice, even if the money hasn't changed hands.
The accrual method offers a more realistic idea of income and expenses and gives you a long-term picture that cash can’t provide.
3 financial statements you need to know
To make informed decisions, you need to review the following financial statements: income (profit and loss) balance sheet and cash flow.
1. Income statement:
- Used to assess profitability
- Shows revenues and expenses over a specific time
- Will outline the company’s total sales, expenses and net profit over a specific time
- Accountants generally prepare an income statement on an accrual basis to follow International Financial Reporting Standards (IFRS). The income statement then accounts for depreciation, receivables, payables and inventory changes
Cash in the bank doesn’t tell you if the operation was profitable in the past fiscal period. Only an income statement can tell you that.
2. Balance sheet:
- Provides a snapshot of financial position at a specific point
- Displays the company’s assets, liabilities and shareholders’ equity
- Assets - Liabilities = Equity
Cash in the bank is just one element of your asset base. It doesn’t tell you anything about the business’s liabilities.
3. Cash flow statement:
- Shows the net change in cash position over a specific period
- Adjusts for non-cash expenses such as depreciation
A cash flow statement shows what occurred and can inform your cash flow budgets as you project into the future. On its own, your bank balance doesn’t have much value if you don’t account for upcoming expenses and revenues.
Also, if you operate using cheques or have operating lines, keeping track of cash flow is not as easy as using a bank account. You need a good software management system or, at the very least, the use of a spreadsheet to track cash flow.
Note: Information from the balance sheet and the income statement is needed to create the cash flow statement. A good accounting software program will help with this.
Ready to get a clear look at your company’s financial picture?
Here are 4 things you can do to get started:
- Collect information from your income tax returns, financial documents, accounting software and other records.
- Complete and update financial statements regularly and track this information.
- Calculate ratios regularly. Use FCC financial ratio calculators to make the process easier.
- Talk to your financial advisor, accountant or lender about using these tools for continual analysis of your business’s health.