Read on -- you don’t need a CPA or MBA to use accounting information to drive your business.Many entrepreneurs see accounting as 'rear view mirror' information, showing them what happened last year and how much they owe in taxes.To move your business ahead, qualify for financing and enhance profits, you need to learn to use accounting information to make smart business decisions.

So, let’s add to your business toolkit:

• Cash Flow Statement
• Income Statement (P&L)
• Balance Sheet

Cash Flow V. Profit

There’s an old adage that “Cash is King”, but “Cash Flow” is not “Profit.”

Cash Flow -- tracking 'cash in' & 'cash out' sounds simple; we do it in our personal checkbooks. But in business, it’s easy to run out of cash because of an unexpected shortfall in revenue.

Survival depends on cash flow. Running out of cash is the most common reason that businesses fail.

Profit -- is the difference between revenue and expenses. To get an accurate picture of profit, it’s important to 'match' expenses with the revenue generated by the expenditures.

A positive cash flow does not mean that your business is profitable. For example, if your business accepts up-front payments and doesn’t record the related expenses for product support, your business may be generating cash but really not be profitable.

On the other hand, it is possible to be profitable and have a negative cash flow. For example, if it takes your business a long time to collect for products and services, you may be profitable but cash poor.

Cash Flow Statement

The Cash Flow Statement is a projection of revenue and expense, month by month, and helps you 'see' that the Company will have the cash to pay the bills on time.

Projections should be your best estimate based on past experience and current trends as to what revenues and expenses are likely to be. To be an effective tool, the Cash Flow projections must be realistic. I recommend being conservative (e.g., understating revenue estimates) so that there’s a cash cushion.

It’s essential to keep track of actual cash flows. This is a checkbook-like review of cash receipts and cash disbursements. This should be done at least monthly and steps should be taken to accelerate the receipt of cash and control expenses. (See the prior eNews re Improving Cash Flow.)

Income Statement (P&L)

The Income Statement is like a report card or scorecard. Unlike Golf, higher scores are better.

The Income Statement, also called the Profit & Loss (P&L), is a summary of revenue and expenses over a period of time, and helps you see a consolidated picture of all the expenses incurred in running your business relative to the revenue produced.

It’s important to keep a careful eye on trends in revenue, and expenses as a percent of revenue. (See prior eNews re Profitability Checkup.)

Gross margin is a useful tool to help you understand the profitability of your business, and particular parts of your business. For example, 'gross margin' is product cost as a percentage of revenue. If you pay $50 for a product and sell it for $100, your gross margin is 50%.

Generally, gross margin runs 40-60% of revenue.

If your gross margin is lower, you’ll want to consider some options:
- Increase your price?
- Find a lower cost supplier?
- Discontinue the product?
- Change the packaging to enhance perceived value?

Operating Expenses broken out as a percent of revenue also help you understand if your expenses are consistent with industry guidelines, or are excessive relative to revenue.

For example, as a rule of thumb, rent should be about 10% of revenue. If your rent is a higher percentage of revenue, you’ll want to consider some options such as:
- Subletting some space.
- Figuring out how to generate more revenue per square foot of your space.

Profit & Loss accounting information for different parts of your business may help you make informed decisions about pricing and whether to expand or drop certain products or services.

Balance Sheet

The Balance Sheet is a snapshot of the assets, liabilities and capital investment of the business.

You can use the balance sheet for several key ratios:

- Current Ratio (Current Assets/Current Liabilities)
Good = 2-1.

This indicates the liquidity of the business and tells you whether you can pay the current obligations of the business. It’s considered good if current assets are two times greater than current liabilities.

- Accounts Receivable Turn (Accounts Receivable x 365 days/Net Sales)
Good = 30 days or less.

This tells you the number of days to collect money owed.

- Inventory Turn (Inventory x 365 days/Cost of Goods Sold)
Good = low number.

This tells you the number of days to sell Inventory.

In conclusion, with these tools, you can take accounting information out of the 'rear view' and into the 'Driver’s Seat' so that you can use the information as you drive your business.