As a provider of bookkeeping services to small businesses, I cannot stress enough how important it is for business owners to maintain insight and understanding into their financial statements. When business owners don’t check in with their own financial statements, they end up operating in the dark. Here is a look at the key reports to look at and how to make sense of them.
The three main statements that you want to review regularly are your Income Statement, Balance Sheet, and Cash Flow Statement. Let’s start by taking a look at what each of these reports are for:
Income Statement: the Income Statement (a.k.a., the Profit & Loss Statement) will give you a view of how your business is performing over a period of time by highlighting revenue earned as well as expenses incurred. This statement allows you to see trends in your business' profitability.
Balance Sheet: the Balance Sheet lists all assets (i.e. cash, accounts receivable), liabilities (i.e. payables, loans), and your net equity (i.e. how much has been invested and earned over time). The balance sheet gives you a snapshot of your business’ financial health. Unlike the Income Statement, which gives information for a certain period of time, your Balance Sheet is a summary of key financial information on a given date.
Cash Flow Statement: the Cash Flow Statement will fill out the picture created by the Income Statement and the Balance Sheet by showing whether cash is coming in at a rate faster or slower than the rate at which its going out. Over the period of time for the Cash Flow Statement, you will see the sources and uses of your business' cash flow. Unlike the Income Statement, the Cash Flow Statement will allow you to see the business' total spending, as it will include expenditures on assets such as equipment and inventory.
How to Generate Financial Statement and Who to Turn to for Help
You want your financial statements to be prepared regularly and accurately, as you will be relying on this information to make real-time business decisions. Set up a schedule with your bookkeeping services provider to review these financial statements on a monthly basis. If you’re going it alone you can use QuickBooks as a tool to generate these reports To get started on the right foot, you may consult with a bookkeeping services provider or with a QuickBooks ProAdvisor. If you do use QuickBooks make sure that the QB Chart of Accounts is set up to best support the structure of the reports. More on this here.
In terms of collecting the information for these statements, you should make sure that you have a system in place in which you are closing your books monthly. Here you can get some advice on how best to make collecting, verifying, analyzing and discussing your month-end numbers part of your routine.
Why These Statements Are So Important
Your financial metrics, properly understood, can serve as a roadmap for your business. In examining profitability and cash flow, you’ll be able to spot where the issues are and learn how to address them. This information isn’t just important to your business’ survival and growth (though of course it is) but is also important for making presentation’s on your business plan and business’ financial health to banks and investors. These financial statements serve as a great business tool for you, the business owner, to run and grow a financially healthy organization.