Running a business full time is a lot of work. Not only are you running the company, you’re attempting to keep employees happy (if you have them), trying to get the word out about your business, and on top of that, trying to manage your finances.
Understanding your financial statements is key to effectively running your business and making smart decisions. Your financial statements can shed light on areas of your business and can help you identify areas for growth and for improvement.
Here are a few examples of things your financial statements can tell you.
The balance sheet tells you about the resources (or sometimes lack of resources) in your business. This financial statement is measured at a point in time (as compared to a period of time). Here are some of the measurements the balance sheet is responsible for telling you:
The income statement tells you about the profitability (or again sometimes lack of profitability) of your business. This financial statement is measured for a period of time, such as a month, quarter or year. Here are some of the measurements the income statement is responsible for telling you:
In addition if you are tracking your income and expenses by profit centers (ex. job, department, product line, etc.), you would be able to see all of the above measurements by those profit centers. This is especially valuable as it helps determine where you are making money or losing money.
The statement of cash flows tells you about the sources and uses of your cash. In other words where did it all come from and where did it all go?
You can take your financial statements to the next level by comparing your current performance against historical performance, benchmarking yourself against your industry and peers, and projecting your future performance.
To wrap it all up, financial statements provide a wealth of information for you to make more informed decisions about your business. Knowing and understanding where you stand financially can mean the success or failure of your business.