If you want your small business to survive and thrive, you need to know your financial statement inside out. That means understanding your income statement, balance sheet, and cash flow statement. Don’t know what these statements are? No problem – read on to learn more.
What are financial statements?
Financial statements are accounting reports. There are three primary financial statements, and if used properly, they can show you how your business is doing financially.
Why financial statements matter
By using financial statements as a financial management tool, you can understand the financial health of your small business. An accountant can help you keep track of all this information and give you financial advice to help your business grow.
Financial statements show how much money your business has made and spent, how much debt your company owes, and how much cash is coming in and going out. Financial statements are like a map of your business’s financial health.
Many small business owners feel like they can’t afford an accountant, but if you think of your time as finite and there is only so much you can do in a day, you may find you can’t not afford an accountant. When you have someone handle financial matters for your business, you can focus your time on generating sales or running the business. Most people don’t like doing the bookkeeping, and as a result, it either doesn’t get done or doesn’t get done right.
Without accurate financial statements, it’s impossible to manage a business properly and may lead to financial problems down the road. You can avoid financial trouble if you know how your financial statements are doing throughout the year.
For example, you might see that your company’s total accounts receivable is growing – which could be a sign of financial trouble ahead. Or you might discover that your cost of goods has grown, and now your gross profit margin is low – signaling a time to raise prices. Or maybe your overhead costs are too high.
Financial statements can help you identify these critical numbers and uncover other potential financial problems so you can address them before they cause real damage.
Types of financial statements
There are three primary financial statements: the income statement, balance sheet, and cash flow statement.
The income statement, also known as a profit and loss statement or P&L statement, is the one most people are familiar with. This statement shows how much money your business has earned and spent during this time period. Revenue, or income, is the money that comes into your business. Expenses are all of the costs associated with running a business.
Information from the income statement can be used to make better-informed decisions about your company’s pricing, profit margin maintenance, and expense control.
The balance sheet is another financial statement that provides a snapshot of your company’s financial condition at a specific period of time. This statement shows a business’s assets (what your company owns), liabilities (money your company owes), and net worth (assets – liabilities).
Assets are everything your company owns, while liabilities are all of the money you owe.
Cash Flow Statement
Like an individual’s checkbook register, the cash flow statement shows how much cash is coming into and out of a business. This statement shows how much cash a business has generated and used up over a specific time period. This statement is important because it can indicate whether or not a business has enough money to keep operating.
Cash flow problems can arise when a company doesn’t properly budget and plan for the future or if you need more cash than your business generates. You’ll want to understand the financial impact of any financial statement, but it’s especially critical with financial statements like financial statements and budgets that affect your bottom line. If you
How do I read financial statements?
A financial statement is like a map of your business’s financial health. The financial statement can help you identify these and other potential financial problems so you can address them before they cause real damage.
But how do you know if your numbers are good or bad? Compare dollar amounts from year to year or from month to month. Many companies have seasonal sales cycles, and the relevant comparison is how you did over that period of time compared with the same period in prior years. For example, if you sell Christmas wreaths, you would want to compare your sales after Thanksgiving through the end of the year to that period of time every year, with the goal of being more profitable every year. Additionally, you would want to compare your results with others in the same industry. Your best resource for that is a trade association for your business.
Making it in today’s business world requires more than looking at the bottom line on income statements. It involves understanding and interpreting what the income statement, balance sheet, and some key financial ratios really mean. It involves using that information to make informed business decisions. financial
If you’re not quite sure where to start, a financial advisor, business coach, or accountant can help you understand your business financials, which ratios to watch for in your industry, and what they mean for your business.
Other Uses for Financial Statements
Detecting Inventory Fraud
Most businesses experience some degree of inventory shrinkage, but for retailers, this loss can have a significant impact on the bottom line. In fact, inventory theft is one of the most common types of crime, and it can be difficult to detect. One way to uncover signs of theft is to examine your business’s financial statements closely.
One way to do this is to compare the cost of goods sold on the income statement to the inventory levels on the balance sheet. Consistently monitoring these numbers can indicate inventory that has been stolen.
Another red flag is an increase in the cost of goods sold without a corresponding increase in sales. This could indicate that employees are pocketing cash from sales or selling merchandise below cost. Also, if you see a sudden drop in sales but no corresponding decrease in inventory levels, that could be a sign that employees are stealing merchandise.
By keeping a close eye on their financial statements and using loss prevention methods such as video surveillance and security tags, retailers can ensure that their inventory levels are accurate and limit losses due to theft.