There is a lot of focus on having clean financial statements to understand your business’s performance and have your tax returns prepared at the end of the year. However, there’s more value that business owners can gain out of having clean, up-to-date financial statements.
Understanding income statements and balance sheets are a necessary function of running a successful small business.
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. 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.
Understanding income statements and balance sheets are a necessary function of running a successful small business. As we discussed, financial statements provide the business owner with the ability to understand a critical part of the business’s performance. Lenders also use them to determine your ability to secure and pay back a loan.
Let’s take a look at how a client of Expex could use their clean financial statements to grow their business.
The client was growing so quickly that they couldn’t keep up with demand. They also weren’t keeping up with their financial reporting and therefore weren’t able to get funding to support their growth. They committed to get their financials cleaned up and understand the basics of both their income statement, balance sheet, and statement of cash flow. This process allowed them to manage their business more profitably, request funding that would enable them to grow, and seek out investors for their business.
The client was not taking advantage of several tax credits because there were assets that we note on their balance sheet. They were able to reduce their tax liability, thereby creating more working capital and improving both their cash flow and their bottom line. By doing so, they were also able to reduce their need for outside funding, which meant they had a higher likelihood of getting direct loans and retain more equity in the business when negotiating with investors.
The client couldn’t get funding because they didn’t have clean financials. In addition, they had left valuable assets off their balance sheet. When these were corrected, the business showed a profit and had a hidden value found by adding the assets to their balance sheet. Hidden Value is the value created when assets are not properly valued on the balance sheet. In this case, the asset had been completely left off the balance sheet, making the business look vulnerable. Once the assets were added, the strength of the balance sheet improved significantly.
The client could attract investors by having clean financials that showed the business’s actual value and clearly show that they understood their income statement and balance sheet. Investors are looking for business owners who not only understand their business’s unique value proposition but the financials behind the business. Investors also want to know how the investment they are being asked to make will impact the growth of the business and, ultimately, how they will exit the investment. Having clean financials and discussing the performance and how the funds will be used created a successful fund-raising event.
Does your bookkeeper or accounting firm do all this for you?
Getting started with understanding your financial reports begins with making sure your accounts are current and accurate. You need more than a bookkeeper to perform financial tasks. We want you to be successful, and we know what it takes to do that. Time spent on bookkeeping and financial tasks requires both time and knowledge. Hire Carly, and we will do the bookkeeping for you. Then you can return to spending time on building your business!
Expex, based in Schenectady, NY, offers convenient and innovative bookkeeping services to help your business succeed. Our application, Carly, can do everything a traditional bookkeeper does and more. This financial management program expertly delivers services such as bill payments, bank and credit card reconciliation, and financial records consolidation. Call (518) 389-2305 today to get started, or contact us to learn more about Carly.