Business Basics: How Important Are Financial Statements?
As a small business owner, do you have your financial statements in order? Do you even know what financial statements matter?
It's common for small business owners not to realize the importance of financial statements. If you're self-funded, paying for business expenses from your own income and savings, you may think statements don't matter.
If you're looking for outside funding, your probably realize that these documents are important, but you may not know what to prepare or where to start.
Here's what you need to know about financial statements for your business!
Know Where You Are: The Balance Sheet
The first kind of financial statements are the ones that tell you where you are right now. They give a snapshot of your financial wellness at a particular point in time.
Creating a balance sheet gives you that understanding and allows you to share it with creditors, investors, and others who might be interested. Your balance sheet will show your assets, liabilities, and owner's equity as of a specific date.
Your assets are anything your company owns that has value. This includes cash, inventory, accounts receivable, land, investments, buildings, equipment, and even some intangible assets.
If you run a small service-based business, you may think you don't have many assets. However, your office equipment, accounts receivable, intangible assets, and cash still count. So don't think it doesn't apply to you!
Your liabilities are obligations your company has as of the date of the balance sheet. Be sure to include things like loans payable, accounts payable, warranty obligations, taxes owed, and more.
Essentially, any debt or payments you're making should be in this area.
How much of your company do you own, and how much belongs to investors or creditors? The owner's equity on the balance sheet tells you the amount of assets that came from the owner and not from creditors.
Knowing What's Coming and Going: The Cash Flow Statement
Now that you know where you stand, it's time to find out what your financial future looks like. The way investors and others measure that is by using cash flow.
To get a cash flow statement, start by reviewing all of your business' sources of income. These include cash from operations, or doing your business, as well as income from business investments and financing activities.
You also want to include cash outflow on your statement. This category is for payments you make for interest, taxes, supplies, salaries, rent, and other operating expenses.
A cash flow statement is important because it can show you where you're leaking money. It also shows you what your best-performing products and services are, and helps you make decisions on where to focus your efforts.
The Final Grade: The Income Statement
Finally, and income statement (also known as a profit and loss statement) will give you the "final grade" on how your company is doing right now.
This financial statement will display your income and your losses so that you can see if your company is currently profitable. If it's not, you may struggle to get investors without a clear plan to move toward profitability.
Very simply, the income statement shows quantity of sales, the expenses you incurred, and the net profit. This shows you how much you've made or lost during the year.
An income statement is different than a cash flow statement because it doesn't show exactly when revenue comes in or expenses go out. It does, however, show the expected result at the end of the reporting period.
Understanding the Importance of Financial Statements
You may be thinking to yourself, "This looks like a lot of work! Why would I put in all this effort, especially if I don't have investors?
The truth is that financial statements help you in a wide variety of ways. Here are just a few examples.
Gain Credit and Investment More Easily
Getting funding isn't just for Silicon Valley startups. A lot of small business owners find themselves at a bank or in front of a potential partner.
Knowing your numbers will make these conversations go very smoothly, and you will impress with your professionalism. On the other hand, fumbling around and having no idea what your profit or costs are will send others running the other way.
Make Better Business Decisions
Your numbers don't just help other people understand your business, they are essential to you understanding your own company!
Can you afford to invest in a new product line? Can you afford to divert attention from your main income to launch a new service? Where can you cut costs so that you can increase profitability?
Knowing your numbers will help you be strategic in your business. You'll have a pulse on what's going on so that you know when to move forward, when to hold back, when to cut expenses, and when to invest.
Keep Your Clients Honest
Did you send an invoice months ago that still hasn't been paid? If you don't keep up with your financial statements, you might have no idea.
Keeping up with your documentation can help you send reminders to clients who owe you, which keeps food on the table and suppliers paid up. You can't afford to gamble with your business!
Be Ready at Tax Time
One of the biggest advantages of staying on top of your numbers all year is that you are ready at tax time. No more hours of digging for receipts and hoping you can remember what the credit card charge was for.
Instead, having a monthly or quarterly financial update will keep you current on all of your expenses and income so that tax time will be a breeze.
Get Your Accounting in Order Today!
Are you ready to get your accounting and financial statements in order? We'd love to help!
You can't afford to underestimate the importance of financial statements for your business. Keep everything streamlined and in top shape with Scrubbed.
Contact us for a free consultation today!