Accounting – Check for these 4 Warning Signs when Reading your Financial Statements

Are you a small business owner, do you know how you can use your business financial statements to make sound decisions? And before we begin exploring the five warning signs that you should check in your financial statements, do you prepare them in the first place? If you don’t, then, you have to start preparing the accounts in-house or engage an accounting service in Singapore as they help you monitor the performance of your business.

Reading your business financial statements isn’t a difficult task once you comprehend the layout of various financial statements (For instance, the statement of comprehensive income and statement of financial position) and the language used. As you read and analyze your business financial statements, watch out for these big warning signs.

Increasing inventory

Increased inventory could be implying that your products are not selling. This could result in spoilage or obsolescence. However, not all cases of inventory increase are associated with loss.

To spot increasing inventory, calculate the average inventory for your accounting period and divide the results by this year’s sales. If this percentage exceeds the prior years, the chances are you have inventory that you can’t sell.

Increasing receivables

We all know that a huge receivables figure is good. However, if you are not sure that you will collect the figure, don’t celebrate. Sometimes, the customers may not pay as expected especially for accounts that have stayed for a long time without being paid. Therefore, increasing receivables could imply that you are not effective in collecting your clients owe you (Also see Accounts – Reasons Working Capital Requirements Can Increase).

Fixed assets disposal

There is nothing wrong with selling equipment that is unnecessary for your current business operations. The problem arises when the business owner disposes fixed assets (Also see FRS16: Property, Plant, and Equipment) and uses the money generated by such sales to meet short-term expenses or pay their personal debts.

Failure to reinvest the cash generated from the disposal of fixed assets may result in serious problems in future operating revenue.

Poor cash flow patterns

Don’t be blinded by the fact that your business is generating some good profits. It could be suffering from poor cash flow patterns, and this can make your financiers rise eyebrows and sometimes conclude that you are poor in collecting receivables.

Conclusion

The preparation of the financial statements isn’t an option for businesses in Singapore. Apart from the preparation of these reports, you as the business owner should read them keenly watching for the above warning signs. With that, you need a competent accountant (See 5 Ways a competent Accountant will save your Business Money), who can prepare accurate financial statements that can show the cash flow patterns, the level of inventory, how cash from disposed fixed assets is reinvested in the business and more.