Unlocking Business Insights: Using Key Financial Ratios to Analyze Small Business Performance

In the competitive business world, small business owners need to make informed decisions to ensure the success and growth of their ventures. One crucial tool at their disposal are financial ratios, which provide valuable insights into a company’s performance.

By understanding and leveraging financial ratios, you can assess your business’ financial health, identify areas for improvement, and make strategic decisions to drive their businesses forward. This article will explore the power of key financial ratios and how you can use them effectively.

The Significance of Key Financial Ratios

Financial ratios are quantitative tools that help assess a company’s financial performance, efficiency, profitability, and liquidity. They provide a snapshot of the business’s financial health and offer benchmarks for comparison with industry standards and past performance. You can utilize these key financial ratios to understand your company’s financial position and make data-driven decisions.

Liquidity Ratios: Liquidity ratios help you understand your cash flow by assessing your ability to meet short-term financial obligations. You can calculate ratios such as the current ratio and quick ratio to determine if the company has enough liquid assets to cover immediate expenses. These ratios help identify potential cash flow issues and enable proactive measures to ensure smooth operations.
Profitability Ratios: Profitability ratios measure a company’s ability to generate profits and help in assessing business performance. Ratios such as gross profit margin, net profit margin, and return on assets (ROA) enable you to gauge your profitability and compare it to industry standards. By analyzing these ratios, business owners can identify areas for cost reduction, pricing adjustments, or revenue enhancement to maximize profits. We explore many of these in The Ultimate Small Business Profitability Checklist.
Efficiency Ratios: Efficiency ratios provide insights into how effectively a business utilizes its resources to generate revenue. You can analyze ratios like inventory turnover, accounts receivable turnover, and asset turnover to assess operational efficiency. These ratios help identify bottlenecks in the supply chain, inventory management issues, or inefficiencies in resource allocation, enabling you to streamline operations and improve overall efficiency.
Debt Ratios: Debt ratios evaluate a company’s leverage and ability to meet long-term financial obligations. You can calculate ratios like debt-to-equity and interest coverage ratios to assess their company’s risk exposure and debt management capabilities. These ratios assist in making informed decisions about borrowing, managing debt, and maintaining a healthy balance between equity and debt.

Interpreting and Applying Financial Ratios

While understanding these key financial ratios is essential, interpreting them correctly is equally crucial.

You should compare their ratios to industry benchmarks, historical data, and competitors to gain meaningful insights. Additionally, tracking ratios over time allows you to identify trends and evaluate the impact of strategic decisions.

It is essential to note that financial ratios should be used with other performance indicators and qualitative analysis to make well-rounded assessments. You can learn more about some of these metrics in The Ultimate Small Business Profitability Checklist. You’ll also find key financial ratios formulas in a key financial ratios pdf.

Financial ratios serve as invaluable tools for small business owners to assess their company’s performance, financial health, and areas for improvement. By leveraging liquidity ratios, profitability ratios, efficiency ratios, and debt ratios, you can gain a holistic view of their operations and make informed decisions to drive growth and success.

Understanding and interpreting financial ratios empowers you to optimize resource utilization, manage cash flow, improve profitability, and make strategic decisions for your business.

To learn more about how to calculate these ratios using your financial statements, check out How to Read Financial Statements: A Guide for Business Owners.

If you’d like help better understanding your financial ratios why not book a free consultation with one of the experts at Avisar.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

What is SR&ED

SR&ED stands for Scientific Research and Experimental Development. And if you want to get tax benefits for doing R&D in Canada, you should know about the SR&ED tax credit program.

Our guest expert, Jude Brown, CEO & Co-Founder of Bloom Technical, explains what the program is, how to qualify, and what you need to do to apply.

The SR&ED tax credit program rewards Canadian businesses for doing innovative and risky work in their fields. The CRA runs the SR&ED tax credit program, and it gives you tax credits, refunds, and deductions for your R&D expenses. But only some businesses can qualify for the program.

How Do I Apply for the SR&ED tax credit program?

You need to meet some criteria to be eligible. Here are the main ones:

You must be a CCPC, a Canadian partnership, a sole proprietorship, or a trust. CCPCs get the most benefits from the program.
You must do scientific research or experimental development to create new or improved products, processes, materials, or knowledge.
You must face technical risk, meaning you don’t know if your work will succeed or fail. You must demonstrate your project iterations.
You must keep proper records of your R&D activities, including what you did, how you did it, and what you learned.

To apply, you need to fill out Form T661 and submit it with your tax return. This form asks you to describe your R&D activities in detail and report your expenses and outcomes.

This can be tricky and time-consuming, so getting help from a professional SR&ED consultant is best. They can help you prepare your application and maximize your benefits.

How Big Could My SR&ED Claim Be?

The size of your tax benefits depends on your business type, income, and tax rate. The CRA has different formulas for each factor. The more you spend on eligible R&D expenses, the more you can claim. But there are limits and rules to follow.

Eligible R&D expenses include:

Salaries or wages of the employees who worked on the R&D project
Contractor fees for the arm’s length parties who performed R&D on your behalf
Materials that were consumed or transformed during the R&D project

Some expenses are not eligible for SR&ED, such as capital, overhead, and marketing costs. You also need to prove that your R&D expenses are reasonable and related to your industry. In BC, businesses can expect to get about 64% back from eligible SR&ED expenses.

To get an accurate estimate of how much you can get from SR&ED, contact us today, and we can put you in touch with a SR&ED professional. You can also find extensive information on the program through the CRA.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

Federal Budget 2023: Previously Announced Measures

Budget 2023 confirms the government’s intention to proceed with the following previously announced tax and related measures, as modified to take into account consultations and deliberations since their release.

Legislative proposals released on November 3, 2022 with respect to Excessive Interest and Financing Expenses Limitations and Reporting Rules for Digital Platform Operators.
Tax measures announced in the Fall Economic Statement on November 3, 2022, for which legislative proposals have not yet been released, including: automatic advance for the Canada workers benefit; investment tax credit for clean technologies; and extension of the residential property flipping rule to assignment sales.
Legislative proposals released on August 9, 2022, including with respect to the following measures:
borrowing by defined benefit pension plans;
reporting requirements for Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs);
fixing contribution errors in defined contribution pension plans;
the investment tax credit for Carbon Capture, Utilization and Storage;
hedging and short selling by Canadian financial institutions;
substantive Canadian-controlled private corporations;
mandatory disclosure rules;
the electronic filing and certification of tax and information returns;
Canadian forces members and veterans amounts;
other technical amendments to the Income Tax Act and Income Tax Regulations proposed in the August 9th release; and
remaining legislative and regulatory proposals relating to the Goods and Services Tax/Harmonized Sales Tax, excise levies and other taxes and charges announced in the August 9th release.
Legislative proposals released on April 29, 2022 with respect to hybrid mismatch arrangements.
Legislative proposals released on February 4, 2022 with respect to the Goods and Services Tax/Harmonized Sales Tax treatment of cryptoasset mining.
Legislative proposals tabled in a Notice of Ways and Means Motion on December 14, 2021 to introduce the Digital Services Tax Act.
The transfer pricing consultation announced in Budget 2021.
The income tax measure announced on December 20, 2019 to extend the maturation period of amateur athletes trusts maturing in 2019 by one year, from eight years to nine years.
Measures confirmed in Budget 2016 relating to the Goods and Services Tax/Harmonized Sales Tax joint venture election.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

5 Top Reasons Small Businesses Fail and How to Avoid Them

Why does the prospect of starting a small business come burdened with high risk? According to Innovation, Science and Economic Development Canada, the smallest businesses in Canada that only start with fewer than five employees have only a 62.5% chance of remaining open after five years and a 28.6% likelihood of survival after 17 years. However, small businesses with under 100 employees make up 97.9% of all businesses in the country. Therefore, even with high risk, many small companies still survive.

Understanding why small businesses fail will help a company to enact programs that prevent the most common reasons for failure and increase chances of succeeding over the year.

1. Not Understanding the Numbers

A big reason why small businesses fail is a lack of funding or working capital. This can often come as a result of not understanding, or not paying attention to what their financial statements are telling them.

Not accurately tracking your revenue and expenses will leave you flying blind. Are you really profitable? Do you know? In some instances revenue may be great and the balance sheet might look strong, but you may not actually have the cash to keep your business running.

As a business owner, you need to know how much of your revenue is needed for wages, utility bills, or rent so you can set growth and cost-savings goals accordingly.

Taking the time to read and understand your financial statements can prevent you from being surprised and allow you to react and plan in a way that moves your business forward.

Resource: How to Read Financial Statements for Business Owners

2. Not Knowing About Funding Options or Starting with Adequate Capital

Many small business owners don’t understand how difficult getting loans from banks can be. Without adequate funding, some business owners may attempt to dip into personal savings or friends to finance their ventures. Banks recognize the risk of small business failures. Consequently, they are historically less likely to provide loans.

To help business owners get operating funds, the Canadian government took action and passed amendments to both the Canada Small Business Financing Act and the Canada Small Business Financing Regulations to make getting loans easier for small business owners and less risky for financial institutions. The lenders share some of the risks with the business owners and have new products available for the small businesses to use.

Under this program, small businesses can use lines of credit for daily operating expenses or term loans for major business purchases. Each type of funding allows the lender to apply additional interest on top of its prime lending rates or mortgage rates, depending on the product. While businesses pay slightly more in interest, they have a greater chance of getting the funding they need to establish and grow their businesses.

The good news in Canada comes from the 2021 small business Credit Conditions Survey. The majority of small businesses that sought financing had full or partial approval. For instance, 89% of small businesses earned approval for either short or long-term loans. Among the 42% of businesses that requested government financing, 95% got at least some of the funds they asked for. While 85% of businesses reported not requesting financing because they didn’t need it, 3% of businesses did not know where to get funding and 4% didn’t apply because they thought their request would fail. Businesses that don’t seek funding will never get the money they need.

It can help your cause to know what financial ratios and metrics your bank or lender will be most interested in. Speak to your accountant first and make sure those numbers are in good shape and identify other information that may help your application.

3. Not Meeting Market Needs

The type of business can make a difference in whether it will last. In Canada, small and medium businesses that sell goods had higher survival rates from three to 17 years than those that provided services. However, even for companies that provide goods, the chances of survival depend on meeting the market’s needs for products. If goods sold have no buyers or fail to have profitable pricing, the business still risks failure.

Several famous products failed because they lacked market demand. The Microsoft Zune portable music player could not distinguish itself nor compete with the well-established iPod. The augmented reality tool Google Glass looked unattractive while wearing it, cost far too much for most people to afford, and had poor marketing to promote it. Finally, the Segway could not find an audience of users when alternatives, such as biking or walking, already existed.

Even initial success can be a hindrance sometimes because it can blind business owners to the need to pivot. Business owners and entrepreneurs can become so invested in their product or service, they miss the signs pointing to the need to change or a new opportunity. That dip in sales might not mean it’s time to spend more in advertising, it could mean it’s time for a bigger shift to a new market, product offering, or sales channel.

4. Failing to Create a Business Plan

Failing to plan for the establishment and growth of a business will lead to its failure. Business plans must have clear goals and outlines for how to manage operations. These plans must include information on managing the company, risk management planning, financing needs and sources, marketing plans, and examination of competition.

Clearly outlining the management of the company during its startup phase and as it grows will ensure an efficient organization of employees and managers that meets the needs of the operation. The business owner must have the ability to delegate tasks to management staff, which allows for easier transitions later if the owner chooses to expand the company or retire. Part of the management plan should include information on an exit plan for the owner. The business owner should not assume that they will run the company forever. Having a plan to pass on operations to a new manager or business owner will facilitate future changes in leadership.

Risks for companies will change over time, but all businesses need to evaluate their sources of potential risk and identify ways to mitigate them. Risk management includes creating disaster plans to respond to emergencies, natural disasters, or security breaches. Cyber security should be an important part of the business plan. According to the CIRA Cybersecurity Survey in 2021, 36% of businesses of all sizes reported more cyber-attacks during the pandemic. Data security is vital to all businesses, but especially for small companies that could face devastating losses. The survey also noted that 17% of businesses suffered ransomware attacks with 69% of those victims paying the fees. A small business could fold under such financial strain.

Financing at the startup gets a business going, but companies need clear financial plans to ensure their businesses remain profitable. Pricing products or services, cutting spending, keeping workers paid, and paying operating costs all should fall into consideration when creating short-term budgets and long-term financial plans.

Marketing plans and analysis of competitors both help ensure the growth of businesses. Companies should differentiate their offerings enough to ensure that they meet customer needs. The Microsoft Zune music player was too similar to the iPod to attract customers away from the Apple product, contributing to the Zune’s failure.

5. Bad Management

Perhaps the biggest reason small businesses fail may be staring at you from the mirror.

Small business owners and entrepreneurs can get so focused on doing things a certain way, often because it worked for them in the early days, that they don’t evolve.

What got you to the point you’re at now, may not be what’s needed to move you forward, or get you through a crisis. A business owner may have the skills and knowledge to build and successfully launch a product to the market, but those are very different skills than building, managing and motivating a team over the long term.

It’s critical as a business owner to recognize you’re not an expert in everything and to surround yourself with people who can fill in the gaps. That could mean hiring the right people, working with a business coach, or seeking advice from your accountant. When it comes to starting and growing a business in Canada, failure is a risk. Planning and assistance from trusted advisors like the chartered professional accountants at Avisar can raise the chances of a business succeeding over time. At Avisar, we offer accounting, business consulting, and tax services to help businesses grow and thrive.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

How do financial statements help in decision-making?

Most small business owners get started to serve customers and to do something they find fulfilling. Not many find that fulfillment in reading financial statements. Yet these statements not only tell them how they’re doing but also suggest actions to promote future success. They are a critical leadership tool to aide in decision making.

When trying to answer the question, how do financial statements help in decision-making, there are three financial statements that every small business owner should understand. They’re the income statement, the cash flow statement and the balance sheet. Here are some keys to using each for business decision-making.

Income Statement

It’s also known as the profit and loss statement, or simply the P&L. It shows all the revenue and expense for a specific time period, be it a month, a quarter or a year.

It reads from top to bottom. Revenue is the top line, net profit is the bottom line, and different types of expenses and intermediate totals are in between, as follows:

Revenue – Cost of Goods Sold (COGS) = Gross Profit.
Gross Profit – Selling, General and Administrative Expenses (SG&A) = Operating Income.
Operating Income – Interest = Pre-Tax Income.
Pre-Tax Income – Taxes = After-Tax Income or Net Profit, aka the bottom line.

While everyone talks about the bottom line, the most fruitful places to make changes are near the top of the sheet.

Increasing revenue improves numbers all down the line.
Decreasing COGS means finding lower prices for inventory and reducing manufacturing costs.
SG&A can be minimized by actions such as reducing utility and building expenses and targeting marketing campaigns effectively.

The last two expenses, interest and taxes, are areas where a business owner should consider consulting an expert for financial advice.

There are ratios that help a business owner gauge financial health.

Gross Profit Margin = Gross Profit / Total Revenue
Operating Profit Margin = Operating Income / Total Revenue
Net Profit Margin = Net Income / Total Revenue

Ratios vary by industry, so it’s hard to make broad statements about desirable numbers. A professional accountant can help benchmark these against industry norms.

Cash Flow Statement

In accrual accounting, income and expenses on the income statement don’t correspond to cash flowing in and out. For example, when a sale is made, the customer owes money and the income statement recognizes revenue. However, a business can’t spend that money until the customer actually pays.

The Cash Flow Statement shows how much money was generated from (or used in) operations and how that cash was used for investments and where it came from in the form of financing. Even with a healthy income statement, a lack of cash means trouble in the future.

There are two ways to calculate cash flow: direct and indirect.

A direct Cash Flow Statement shows changes in cash from three categories:

Operations: cash received for sales minus cash paid out for inventory, wages and other current expenses.
Investing Activities: cash spent for major capital expenditures minus cash received for retiring them.
Financing Activities: loaned money received minus interest on loans.

The direct method is straightforward but requires keeping track of every dollar received or spent.

The indirect method starts with net income from the income statement. It then subtracts any factor that added to net income but didn’t produce cash (e.g., an increase in accounts receivable). It adds anything that’s subtracted from net income but didn’t reduce cash (e.g. a decrease in accounts receivables).

If cash flow is low or varies greatly from period to period, the business should take action to improve it.

Balance Sheet

A balance sheet lists the company’s assets and liabilities.

Assets and liabilities are classified as current and non-current. Current includes cash, receivables, inventory, and debts due within a year. Non-current includes building, major equipment, and long-term loans.

A healthy company has more assets than liabilities.

Assets minus liabilities equals the third category on the balance sheet, retained earnings. This is the amount of money that has been earned and reinvested. Net profits for the income statement are added to retained earnings.

The current ratio is current assets divided by current liabilities. There’s also a quick ratio, which is like the current ratio but excludes inventory from the assets. If this is greater than one, the company can meet its short-term obligations.

The balance sheet also shows whether a company has enough overall assets to cover long-term debt.

Interpreting Financial Statements

A savvy business owner can learn much from the 3 financial statements, and a knowledgeable partner such as Avisar Chartered Professional Accountants can really unlock the statements and show a business how to improve its financial position. Avisar specializes in taxes, statements, and consulting for small businesses, entrepreneurs and non-profits.

Read our Guide to Understanding Financial Statements for Business Owners for more on how to make the most of your financial statements.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

How To Review Financial Statements For Accuracy: 5 Timely Tips

As a business owner, you make a lot of decisions based on your financial statements. You track revenue and plan expenses, often to decide how much take-home pay makes sense for you or whether you can afford more inventory or equipment upgrades.

Your financial statements must be accurate to rely on them. We’re going to walk you through how to review financial statements for accuracy.

Keep Up with Your Financial Statements

One of the best ways to ensure your financial statements are accurate is to keep up with them regularly. While creating an annual balance sheet or income statement is a good start, developing monthly updates to your financial statements is much better.

Creating and reviewing financial statements will help you pinpoint concern areas before they cause problems. Being familiar with your balance sheet, for example, will help you determine if something looks a little off. Without that familiarity, you might not realize when something has been misapplied or forgotten altogether. In some cases this can lead to trouble with the CRA when filing.

Review Your Balance Sheet for Red Flags

Your balance sheet provides a snapshot of your business at a specific point in time. Being familiar with your balance sheet will help you spot red flags. Some of the most common concern areas include the following:

Misapplied Payments. If you received a payment from a customer but applied it to the wrong account (or something similar), your balance sheet on an individual customer account is going to look a little off. Look at individual customer accounts for negative balances to help correct this type of error.
Increasing Debt-to-Credit Ratios. A debt-to-credit ratio shows how much debt you have compared to the amount of assets you have. While a rising debt-to-credit ratio might not always signify a mistake, it can give you an indication of the health of your overall company. Huge fluctuations in this ratio can indicate something was not recorded correctly.
The Balance Sheet Doesn’t Balance. Perhaps the biggest red flag is that the balance sheet simply doesn’t balance. In fact, that is the purpose of the balance sheet—to ensure that assets equal liabilities plus net worth.

Review Your Income Statement With Your Cash Flow Statement

While your income statement and cash flow statement report different information, they can and should be reviewed together. Having a high-profit number on your income statement with a low cash flow statement doesn’t really make sense. When these numbers are not in sync, that could indicate a problem with the earnings that are being reported.

How to review financial statements for accuracy — *Income statements and cash flow statements should be reviewed together.*

Unpredictable Reports

Your reports really should be somewhat similar from month to month. When there are huge, unexplainable swings from month to month, there are likely errors that you need to address. Finding them can be difficult, but having month-sized portions to review rather than entire years can be very helpful to start this process.

Get an Accountant and Work With Them Regularly

Having a third party review your books and records can be extremely valuable. An accountant will be able to take a hard look at patterns and reported numbers to determine where there might be concerns. In addition, if you have your own in-house bookkeeping, having an outside accountant review everything provides a valuable second set of eyes to help spot mistakes.

Need help ensuring your financial statement are accurate? Speak with an Avisar advisor or consider one of our packages with coaching.

Ready to learn more about how to review financial statements for accuracy? Read our free guide How to Read Financial Statements: A Guide for Business Owners.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

Top 3 Things to Look at in Financial Statements for Judging a Business’ Health

Judging how well (or poorly) a business is doing requires a robust understanding of the business’s financials. In a previous post we looked at the three different types of financial statements. In this post we’re going to show you what to look for in your financial statements to know if your business is successful or at risk.

Learn more about how to read and understand financial statements in How to Read Financial Statements: A Guide for Business Owners.

1. Balance Sheet

A balance sheet is essentially a snapshot of a business’s financial situation at a specific point in time. It shows assets, liabilities, and owner equity as they currently stand.

From these figures, you can determine whether a business owns or owes more. Although a single balance sheet provides an accounting at only one moment in time, the financial direction of a business becomes evident if you compare balance sheets across months, quarters, or years.

To see how solvent a business currently is, check its most recent balance sheets’ listed assets and liabilities. The business has positive equity if the assets are greater than the liabilities and has a negative balance if the liabilities are greater. (Owner equity should also be checked but is less commonly an issue.)

You can also see whether current assets (e.g., cash) are sufficient to cover current liabilities (usually due within one year). If they aren’t, the business could have cash flow issues in the coming months.

To see how a business is trending, compare its balance sheet to a previous one (e.g., a quarter or year ago). Asset growth shows that a business is either growing or investing in growth. You likewise can see whether liabilities are declining or increasing.

2. Profit & Loss Statement

An income statement (or profit and loss statement (P&L)) summarizes revenues and expenses over a period of time, usually a month, quarter, or year. Revenues are tabulated and expenses deducted, and the resulting balance reveals whether a business made or lost money during the period.

In the reporting, revenues and expenses are typically broken down into categories. Listing separate categories makes it easier to assess where a business has growth opportunities and/or is spending most of its money. Categories could include online sales, brick and mortar sales, types of products/services, facility costs, wages, inventory costs, and anything else that’s also relevant.

First, look at the overall P&L to assess a business’s general performance. For decision-making, however, check the revenues and expenses of specific categories. You can see whether they’re declining, stable or growing, and you can also see correlations between certain ones. For example, a growth in sales might necessitate higher employee compensation to meet the increased volume.

3. Cash Flow Statement

A cash flow statement converts the profit shown on the P&L to the actual cash generated (or used) from operations. It also shows the cash provided for or used from investing and financing activities.

For example, your P&L may include $100,000 in invoices not collected yet, including in accounts receivable. On the Cash Flow Statement, this will be adjusted as a reduction of $100,000 from the profit shown on the P&L to reflect the actual cash earned.

Cross-reference the cash flow statement with the P&L. The trends of the P&L should continue on a cash flow statement, or there should be a good reason for a difference.

Assess a Business’s Financials

With these three reports, you can accurately assess a business’s financial situation. Compile the reports to check how your own business is doing, or request them as you evaluate one that you’re considering investing in.

It’s also important to be aware that these reports are only useful if all accounts are reconciled and they have been properly prepared considering accruals like revenue and A/P, and non-cash adjustments like amortization and tax expenses.

If you want help examining your financial statements, book a free consultation and we’d be happy to show you what your financial statements are telling you about your business.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

What are the Three Types of Financial Statements?

The primary three types of financial statements are the balance sheet, the income statement, and the cash flow statement. Each offers unique details about a business’ activities and together provide a comprehensive view of a company’s operating activities. We’re going to explain each and show you how these three types of financial statements all fit together.

The Balance Sheet

The first of the three types of financial statements is the balance sheet. The balance sheet provides a snapshot of a company’s financial position at a given point in time. It shows the company’s assets (what the company owns), liabilities (what it has borrowed), and shareholders’ equity (investment and retained earnings).

These numbers should balance each other out: Assets = Liabilities + Equity.

A balance sheet can be prepared daily, weekly, monthly, quarterly, or annually. Many small businesses prepare their balance sheets monthly, perhaps quarterly for smaller businesses.

Analysts can use a balance sheet to identify the health of a company using metrics such as the Current Ratio and Debt/Equity Ratio.

Ultimate guide to reading financial statements

The Income Statement

The income statement is sometimes called the Profit and Loss statement (or P&L). The income statement shows the revenue a company earns and the expenses involved in its operating activities.

The difference between revenue and expenses represents the company’s net profit for a given period of time.

It does this by showing the sales revenue at the top and then deducting direct and indirect expenses.

Direct expenses are your cost of goods sold (COGS). This provides us with gross profit. Indirect expenses include operating expenses (salaries, administrative expenses, research and development, etc.) and secondary activity expenses such as interest paid on loans taxes.

The result is a company’s net income.

Net income at the end of a period becomes part of the shareholders’ equity feeding the balance sheet. Net income is also carried over to the cash flow statement

When analyzing the income statement, you should be looking at the company’s profitability using key ratios like gross margin, operating margin, and net margin as well as tax ratio efficiency and interest coverage.

The Cash Flow Statement

A cash flow statement shows how much cash enters and leaves your business over a set period of time. It begins with the net income from the income statement and subtracts any non-cash expenses.

The cash flow statement shows cash coming and going out of the business in three categories:

Operating: Including revenue, expenses, gains, losses, and other costs.
Investing: Debt and equity purchases and sales; purchases of property, plant, and equipment; and collection of principal on debt, etc.
Financing: Including paying or securing long-term loans, sale of company shares, and payment of dividends.

The cash flow statement shows the change in cash per period, as well as the beginning balance and ending balance of cash.

Now that you have an overview of the three types of financial statements, let’s look at how they fit together to give you a really clear picture of the state of your business. This diagram from the Corporate Finance Institute does a good job of illustrating the similarities and differences between the three types of financial statements, and showing you where they intersect:

	Income Statement	Balance Sheet	Cash Flow
Time	Period of time	A point of time	Period of time
Purpose	Profitability	Financial Position	Cash Movements
Measures	Revenue, expenses, profitability	Assets, liabilities, shareholders’ equity	Increases and decreases in cash
Starting Point	Revenue	Cash balance	Net income
Ending point	Net income	Retained earnings	Cash balance

Source: The Corporate Finance Institute

Learn more about how to read and understand the three types of financial statements in How to Read Financial Statements: A Guide for Business Owners.

Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.

Federal Budget 2022: Previously Announced Measures

Budget 2022 confirms the government’s intention to proceed with the following previously announced tax and related measures, as modified to take into account consultations and deliberations since their release:

Legislative proposals relating to the Select Luxury Items Tax Act (a tax on certain automobiles, boats and aircrafts) released on March 11, 2022.
Legislative proposals released on February 4, 2022 in respect of the following measures:
electronic filing and certification of tax and information returns;
immediate expensing;
the Disability Tax Credit;
a technical fix related to the GST Credit top-up;
the rate reduction for zero-emission technology manufacturers;
film or video production tax credits;
postdoctoral fellowship income;
fixing contribution errors in registered pension plans;
a technical fix related to the revocation tax applicable to charities;
capital cost allowance for clean energy equipment;
enhanced reporting requirements for certain trusts;
allocation to redeemers methodology for mutual fund trusts;
mandatory disclosure rules;
avoidance of tax debts;
taxes applicable to registered investments;
audit authorities;
interest deductibility limits; and
crypto asset mining.
Legislative proposals tabled in a Notice of Ways and Means Motion on December 14, 2021 to introduce the Digital Services Tax Act.
Legislative proposals released on December 3, 2021 with respect to Climate Action Incentive payments.
The income tax measure announced in Budget 2021 with respect to Hybrid Mismatch Arrangements.
The transfer pricing consultation announced in Budget 2021.
The anti-avoidance rules consultation announced on November 30, 2020 in the Fall Economic Statement, with an expected paper for consultation over the summer of 2022, and legislative proposals tabled by the end of 2022.
The income tax measure announced on December 20, 2019 to extend the maturation period of amateur athletes trusts maturing in 2019 by one year, from eight years to nine years.
Measures confirmed in Budget 2016 relating to the GST/HST joint venture election.

Budget 2022 reiterates the government’s intention to return a portion of the proceeds from the price on pollution to small and medium-sized businesses through new federal programming in backstop jurisdictions (Alberta, Saskatchewan, Manitoba and Ontario). Budget 2022 proposes to provide funds, starting in 2022-23, to Environment and Climate Change Canada to administer direct payments to support emission-intensive, trade-exposed small and medium-sized enterprises in those jurisdictions.

Budget 2022 also reaffirms the government’s intention to revise the Employment Insurance (EI) system, including its support for experienced workers transitioning to a new career and coverage for seasonal, self-employed and gig workers. A long-term plan for the future of EI will be released after consultations conclude. As an interim measure, Budget 2022 proposes to extend previous expansions to EI coverage for seasonal workers.

Ask the Right Questions When Hiring Virtually, Pros Say

With remote interviews, many of the cues you would normally use to read a person are lacking. But there are still tactics you can use to help make the right choice when hiring virtually.

Even in normal times, selecting the right candidate for a position can be challenging. But, for many organizations, COVID-19 has made the process even more difficult by requiring employers and candidates to adjust to remote interviews that lack the kind of human connection – including direct eye contact and collegial handshakes – that in-person exchanges can bring.

The shift comes with consequences, experts say. According to new research from Robert Half Canada, more than half (56 per cent) of employers say the cost of making a bad recruiting choice is higher than it was pre-pandemic.

Still, given that remote work is likely here to stay for many and that virtual hiring offers access to larger talent pools, we are likely to see more, rather than less, remote recruiting going forward.

Here are four tactics that can help you make the right decision when hiring virtually.

Prepare your questions

With remote interviews, you have to be slightly more pointed in the way you ask questions, says David Dial, founder of Calgary-based Dial Solutions Group.

“Some people are professional interviewers. They do a great interview. Then they show up and within the first week you’re saying, ‘This isn’t the person we interviewed.’ ”

One solution, Dial suggests, is to ask questions that put the candidate into unique or challenging job-related scenarios. Listen for evasive responses, he adds.

“Take the person away from a script and observe how they behave,” he says. “If they’re feeling uncomfortable answering, dig in a little bit with follow-up questions.”

Connect creatively

When interviewing in person, you can often get a feeling about a candidate by reading their body language, Dial says.

“Remotely, you miss that … so you need to listen very carefully,” he says.

To help compensate for a lack of in-person cues, Michael French, regional vice-president of Robert Half Canada, suggests spending a few minutes getting to know the candidate. Choose questions that showcase their personality and why they are interested in the role and organization, he says, and pay attention to facial expressions and tone.

“Get a good understanding of how and why they came to meet you,” he says. “Make sure their tone comes across as comfortable.”

Connections can also be made with prospective teammates, adds French. Once candidates are shortlisted, arrange video conferences with future colleagues and consider their feedback during the final selection process.

Stay alert to cues

The pandemic has brought added stress for many employees, and it’s important to show flexibility and understanding, says French.

There are limits to employer flexibility, though. If a candidate reschedules an interview more than once, it may indicate someone who is unreliable. If they have persistent technical issues during the interview process, this could be a knowledge gap.

Beyond having the right skills, it often comes down to a candidate’s attitude and the overall impression they make, French says.

“Look out for someone who responds negatively,” he cautions.

This could be a sign they’re not the right fit for the role, adds Dial.

Probe for solutions

Finally, if you find yourself with a bad hire on your hands, try to avoid the knee-jerk reaction of firing on the spot, says French.

Instead, exhaust all options to keep the new employee rather than waste time and resources used to replace them, he advises. For example:

Consider whether talking about any issues – such as punctuality, meeting deadlines – could put things on track.
Assess whether retraining could be easily executed.
Find out if the employee has personal issues because of the pandemic.
Determine whether your virtual onboarding process is effective.

If you must let an employee go, Dial adds, do it fast and within the probationary period. “Mistakes are made when people hire because they’re desperate to fill the role,” he says.

“Take your time hiring the person. But, if it’s wrong, change it quickly.”

Disclaimer:
Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein.

Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.