This post originally appeared on the Louisiana Technology Park blog.
Financial statements are a complete mystery for far too many small-business owners. Some might scan a monthly income statement and balance sheet, but few feel comfortable analyzing a statement of cash flows, much less using the valuable information it has to offer to make critical business decisions.
The advent of QuickBooks and other accounting software changed the structure of the accounting office from what was typical decades ago, says Thomas Cotten, owner of a CPA consulting and tax advisory practice in Baton Rouge. Cotten said that before accounting departments were disrupted by the computer revolution, they often reflected a pyramid structure, with the bottom layer being composed of staff-level employees led by one or more accounting managers. Accounting managers were directed by a controller, or even several controllers in larger companies with multiple departments or divisions. And at the top of the pyramid was the chief financial officer, responsible for helping align the visions and goals of the CEO and other corporate leaders with financial reality.
“What’s happened is we’ve replaced those manual, tedious transactions with the computer,” Cotten says. He recalled once serving as the CFO of a 50-person company: “Back then, I ran a $12 million company, I had five [staff-level employees], one accounting graduate, a CPA controller and I was at the top. Today I’m working with a $10 million company — one bookkeeper; I’m the contract CFO.”
But while technology has made accounting functions easier and more efficient, it has not eliminated the need to read and understand your company’s financials. At a recent Tech Park Academy event, Cotten spoke to entrepreneurs and others in the business community about the fundamentals of how to read and understand financial statements. Read on for tips from his presentation that can help you get a handle on small-business finances.