Being a successful small business owner requires that you understand your company's financial statements. Fortunately, the three key financial statements you’ll be working with are more straightforward than you might think.
The Income Statement (aka Profit & Loss Statement)
Whether you are a service business, a merchandising business, or a combination of the two, you need to keep track of your transactions. An Income Statement allows you to see the profitability of your business by keeping track of your revenues and gains as well as your expenses and losses over a certain period. Also known as a Profit and Loss Statement, your Income Statement is very helpful in making business decisions.
Balance Sheet
The second key financial sheet that will help you understand your profitability and financial situation is the Balance Sheet. This is a financial statement that shows an overview of what a company owns, what it owes, and how much owners and shareholders have invested. Balance sheets are crucial because they let you and other stakeholders know how your business is doing financially.
Cash Flow Statement
The Cash Flow Statement works in tandem with the Income Statement and Balance Sheet to show the financial position and health of a business. The Cash Flow Statement shows whether a business is bringing in cash or losing cash over time. There are two types of Cash Flow Statements that a business may produce, Indirect and Direct. An Indirect Cash Flow Statement is more popular as it is easier to prepare, however, a Direct Cash Flow Statement is easier to use for cash-flow forecasting.
The three statements above are essential for evaluating your business’s performance. Neither the Balance Sheet nor the Income Statement can give you a full understanding without the Cash Flow Statement. When used together, these statements will help you understand your business’s finances and make effective decisions.
Our free Small Business Financial Fundamentals Guide includes a Financial Statements 101 booklet that will explain these essential financial statements in further detail. Included are Income Statement and Balance Sheet samples as well as a Cash Flow template to help you get started. Download Financial Statements 101 from our Resources page and take control of your business’s finances. We are here to help you succeed. Contact us to schedule a free, one-on-one appointment with one of our analysts today!
