The Importance of Financial Statements
What is my net income (profit)? What is my equity (capital)? Where is my cash coming from and going to? Do you know the answers to these questions? If not, you should! Using the three most important financial statements will show you the “whole health” of your business. Let’s review them and learn how.
Income Statement
What is my profit for last month or last year? Well, the Income Statement will answer this question for you because it is a summary of the revenue, expenses, and net income of a business for a specific period of time. It is also commonly called the Profit & Loss. Your revenue (sales) minus your costs and expenses gives you your net income. This net income is then transferred onto the Balance Sheet, which is the second statement we will discuss.
Balance Sheet
What is my current equity? This is what you need the Balance Sheet for as it shows your assets, liabilities, and equity (capital) at a specific date. In other words, it shows what you own, what you owe, and what is left over. It may also be referred to as the Statement of Financial Position. This is useful for comparison and financial analysis to show the ratio of your current assets to your current liabilities. A healthy ratio would be at least 2:1, meaning your assets should be twice your liabilities.
Statement of Cash Flows
Where did my cash come from and where the heck did it go? Ha, don’t we all want to know the answer to those questions! While the Income Statement will show your profitability, it doesn’t show your cash flow from that profitability. This is why you need to review the Statement of Cash Flows every month. It explains how your cash was generated and how that cash was used broken down into operating, investing, and financing activities over a particular period of time. Check your spending and make adjustments as necessary. This can also help you keep to a budget.
In addition to the three statements above, custom financial statements can be generated if you would like to be able to track and compare particular areas of your business. A great bookkeeper will provide you with financial statements on a monthly basis, or at the very least quarterly. This will arm you with all the information you need to be able to make confident financial decisions about your business which will help you grow and prosper. That’s the goal, isn’t it?
Contact me to schedule a free consultation. Let’s discuss what working together would look like for your business.
