Most small business owners like to know how their company is performing, but many don’t completely grasp the ins and outs of reviewing their financial statements to clearly understand their financial position. Reviewing your financial statements monthly is an important process and one that every small business owner should take the time to do. While this can become a very detailed discussion, we thought it would be a good idea to give the highlights in a simple and easy to understand format.
What are “financial statements” and what information can they provide?
Typically, the words “financial statements” refer to your income statement (also referred to as your profit and loss or P&L), balance sheet and cash flow statement. Each is used to provide you with the ability to understand a critical part of your business’s performance. While we will review the basics here, it is important to note that there are financial ratios (calculations that can be performed from the data in the financial statements) that you may want to review with your accountant to gain a more detailed understanding of your business’s performance.
Let’s start with the income statement.
This is the one that most people understand as it provides you with a statement of how much profit (or loss) the business has generated within a specific time frame. The income statement in its most basic format compares your revenue and expenses to determine how much money you have made or lost. The income statement calculation is:
Net Income = Revenue – Expenses.
The income statement may come in different formats based on the type of business you own, and many will separate their cost of goods purchases from their general, selling, and administrative expenses (or GSA). At the end of the day, the bottom line always boils down to how much net income have you generated.
Next up is the balance sheet.
The balance sheet provides you with an overview of your assets, liabilities, and owners’ equity. The easiest way to think of the balance sheet is that it tells you how much your business is financially worth. The formula for the balance sheet is:
Equity = Assets – Liabilities.
You always want to have your business growing your assets faster than your expenses so that your equity is going up. This can get a bit more complicated if you are a manufacturer and buy equipment, but for a service-based business or distributor, its pretty straight forward.
What is the cash flow statement?
This statement shows you how much cash you are generating, which is helpful in determining how well your positioned to pay for your expenses. The cash flow statement will provide you with how much cash you had at the beginning and end of a period as well as the difference. Cash management is one of the areas of financial management that many small businesses struggle with. It is critical to understand how much cash you are generating or using while operating your business and the cash flow statement is a great place to start to manage this.
This is great, but I’m not sure I can do this myself.
That’s why we are here. Carly is a bookkeeping whiz and can prepare these monthly documents quickly and easily. You will soon be able to run your business, grow your business and keep your business healthy with the financial knowledge needed for success.