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Updated: Feb 16, 2023

Understanding your Financial Statements

The Importance of an Accounting System and Chart of Accounts

When they think of financial statements, most business owners think of the compiled statements that their accountant produces at the end of the year for them. In some cases, these were created by providing them with a box of receipts; in other cases, they were produced from your accounting system. In many cases, we find business owners are not looking at their financial statements unless they need them for financing or providing to their bank. This is insufficient if you want to understand where the issues may lie in your business.

Financial statements provide a view into how your business is performing and should be looked at more than at the end of the year because it may be way too late to react to less than desirable results. A professional accounting system such as QuickBooks, Sage, or even one specific to your industry is critical. Once you have the system, it is essential that you have your Chart of Accounts set up for your business. They can be set up so you can breakdown of your revenue by product or service lines, target markets, sales channels, or maybe even geographies. The same is true of your Cost of Goods. It may be necessary down the road to understand the cost of raw materials, packaging, labour, shipping, or anything else included in your cost of goods, especially if you want to know how each product line contributes to your profit or loss. Expenses within a business tend to be the same across industries. Setting up accounts for your balance sheet should be very specific to your business.

Suppose you are putting receipts in a box and printing bank and credit card statements at the end of the year along with invoices and providing them to your accountant. In that case, you are not managing your financials, and this is where we find businesses that find themselves in trouble. If you are unsure how to set up a chart of accounts for your business, ask a professional for help.

Keeping your Bookkeeping Up to Date

Once you have an accounting system, it is crucial that you keep the information up to date monthly. Broadly this includes invoices, expenses, and purchases. For other businesses, this can also consist of job costing and inventory.

Bookkeeping is not a data entry job; it requires someone to understand the chart of accounts and have some understanding of accounting principles. Most small businesses do not need a full-time bookkeeper; in many cases, they can get by by having someone a few hours a month based on the number of transactions their business has. Please speak to your accountant, as many firms have bookkeepers on staff, and for smaller ones, we find they usually have one or two bookkeepers they have worked with and can recommend. A good bookkeeper can be a business lifesaver.

If you are not keeping on top of your bookkeeping, this is where we find businesses run into trouble with paying GST / HST (depending on the province) and payroll taxes. You may be small enough now to pay annually for GST/ HST, but at some point, you are going to be required to pay quarterly or monthly, and if you do not know what you have earned, if you are not tracking this closely, you may not have the funds to pay which paying late can result in fines and interest. The CRA (Canada Revenue Agency) is very unforgiving when business owners and operators borrow their HST funds for other business purposes – these are considered "trust funds" and should be allocated to any other use than remitting to the CRA.

The Importance of Finding a CPA

As a business owner, you want to make sure that you find an accountant for your business with a CPA designation and experience in performing assurance exercises and filing taxes. Just as with any professional you hire, you want to make sure that you feel comfortable with the individual and can sit down and talk to them about your business. You also need to perform due diligence. Different firms will have different focus areas and designations of accountants with specific expertise. In some cases, there might be accountants who also focus on particular industries. Make sure you find one that meets the needs of your business.

Too often, we hear from clients that they drop off their books once a year with their CPA, pick up their statements and taxes once completed, and never speak to their accountant. As an owner, it is up to you to build a working relationship with your accountant and meet with them to get their advice. They are professionals, so this is not a free service but is an important one.

Running and Reviewing Monthly Reports

There are reports that you should run monthly as a business owner to understand how your business is performing. At a minimum, you should be running the following reports:

  • Profit and Loss Detail: This report will provide your revenue, CoGS, expenses and net income. The report lets you know if you are making money monthly. This report is also called an Income Statement.

  • Balance Sheet Detail: This report provides you with your current and long-term assets, current and long-term liabilities and equity. This report shows if you can pay your bills on time by reviewing working capital or if your company is 'technically solvent' by checking net assets or equity.

  • Statement of Cash Flow Detail: This report nicely ties the income statement to changes in the balance sheet. This statement links the balance you had in your bank at the beginning of the year or month and outlines what business activities provided or consumed cash to arrive at your bank balance at the end of the year or month. Clients ask, "If I am making money, why am I always short of cash?" This statement provides the answers; paying back loans, buying equipment, paying back suppliers, and not collecting from your customers all impact the cash balance in your bank.

  • Accounts Receivable Aging Detail: This report provides you with outstanding accounts receivables. You will find out who pays on time and how long others take to pay you; remember, Accounts Receivable is your money in other people's pockets.

  • Accounts Payable Aging Summary: This report provides you with the outstanding accounts payables. This report may give some insight into why some suppliers are easier to deal with than others. Always paying late, or when you are being chased? How is that working out for you?

  • Budget vs Actuals: This report provides you with how you performed versus your budget. The budget should be considered "how you expected the business to perform"; though it is not cast in concrete.

Sitting down and reviewing these financial reports monthly will help you make informed decisions about your business. From the reports you might see:

  • That your expenses are running too high,

  • Your margin is not what is expected,

  • Your accounts receivables are out of control,

  • You are not paying your vendors on time,

  • Or you are not earning the revenue that you forecasted.

Understanding what is going on will help you make the decisions you need to make changes to improve your financials moving forward.

Having Compiled Statements Developed

Every incorporated business should have compiled statements developed by a CPA. The level of compilation is dependent on your requirements. In most cases, most companies have a Notice to Reader performed. In the case of Notice to Reader statements, your accountant is relying on your books, and what you provide them to be accurate and the covering letter will reflect this. Notice to Reader statements are adequate if you are having them performed as a management exercise. If you don't understand the statements, it is vital that you ask your accountant to sit down with you and go through them. Too often, clients tell us they have them done every year but do not understand what they are telling them about their business.

It is essential to review monthly statements within your accounting system, as compiled statements are after the fact, which means they are completed. There is not anything that can be done to alter what has already happened. It is best to catch it early and make the necessary changes so there are no surprises at the end of the year.

For businesses looking for financing or investment in their business, a bank or a lender may want to be Reviewed or Audited Compiled Statements. These two assurance exercises perform more due diligence by the accountant on your books to assure a stakeholder that the financial statements being presented are reasonably accurate. What is required will depend on your credit rating, the amount you want to borrow or have invested, and your past history with the financial institution. Only Licensed Public Accountants can perform assurance exercises such as Reviews and Audits.

Understanding Ratios

As a business owner, you need to understand several ratios about your business. When you go to a bank, in many cases, these calculations will determine whether you get approved for a loan or not. It would be better to know before approaching a lender that you do not qualify versus waiting to be turned down. If you have your compiled financial statements, you can calculate the ratios yourself.


As a business owner, it is crucial that you have a good understanding of the financials of your business. If you do not understand how your business is performing or where there are potential issues, and where to look, it won't be easy to move your business forward and meet the goals that you have set for your business.

If you need help understanding your financials you can get help through business coaching, or have our partner who is a CPA do a financial review or help you through controller services.


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