Rasmussen MA CEC PCC You can learn a great deal about the health of your business by reading and evaluating the information collected on your financial reports. Having this information allows you to make sound business decisions based on facts and it can protect you from fraud. If you wait to review your financial statements with your accountant once a year you lose the opportunity to improve your position.
The three documents to become the most familiar with are your Income Statement, Balance Sheet and Cash-flow Statement.
Your income statement reports your revenue and expenses. This is where you will be able to find the total amount you earned through sales or service and the amount you are spending each month to run the company. If you have more revenue than expenses you will show a profit, on the other hand if you spend more than you earned, then the income statement will show a loss.
Very often novice business owners will only use their bank account balance as their financial report and only when they run out of money start looking to see what happened. By monitoring your profit and loss statement monthly you will proactively be able to make changes mitigating your risk of a financial failure.
I like to think of the income statement as your companies report card. At a glance you can compare how well you are doing in any given period to another to see if for example your marketing efforts are paying off. You will notice when expenses start creeping up and be able to take action to correct things before it becomes serious. If you are loosing money the income statement will let you know.
The information from your Income Statement goes to your Balance sheet which reports everything you own and what you owe.
Often I’m asked “If I made a profit this year why don’t I have any cash?”. Looking on your balance sheet will answer that question. On this report you will see your current assets like cash in the bank and equipment you own. It will also show less obvious assets like accounts receivable and inventory. If you are into your line of credit your balance sheet number beside that bank account will be a negative.
Take a minute this week and print your balance sheet, are there any surprises? Something on there you are not sure of? This is when you reach out to that amazing accountant of yours for answers. If you don’t have an amazing accountant that you completely trust then now is the time to get one, even if you think you can’t afford one, trust me you can’t afford not to have this position covered. (side rant)
The third important report is the Statement of cash flows which is the least used and understood report. Business finance tracking software like Quickbooks have this report and will show your opening cash balance, income for that period from operating and investing activities and will show funds you loaned the company and/or borrowed. For most small business owners a more robust report is recommended so that you can forecast your sales and expenses and document when you think clients are going to pay you so that you can plan for lean months. As part of our program we provide a sample template, if you would like me to email you this reply with a “yes please” and I’ll send it to you. (as a thank you for reading this far!)
Remember that your financial reports are a business owners best friend. This is not true however if your data entry is not up-to-date as discussed in an earlier post , incorrect or incomplete data and these reports are useless. Step one, get all in information entered and step two review these reports and you will feel empowered and more capable of creating a financially strong company.
