“You can’t improve what you don’t measure.”
Perhaps you’ve heard that saying before. In a fast paced and competitive environment, having a good understanding of the financial health of your business is imperative to its growth and development. There are a number of financial reports that can be generated and each measures different things. But, in order to get a big picture view of the financial health of your company the following three statements are critical. These reports should be run and reviewed monthly, quarterly, semi-annually, and annually. You’ll also want to run comparative reports, to evaluate the data compared to the same time period from the previous year.
Balance Sheet: This report will give you a snapshot of your finances as of a specific date. It will show your assets, liabilities, and earnings for a specified period of time. Some of the line items should include available cash, accounts receivable, accounts payable, inventory, and if you have any debt, the portion of any long-term debt due this year and the balance of any short-term loans.
Profit and Loss Statement: This is sometimes referred to as the income statement. This looks at revenue received during a specific time period and the costs incurred in order to generate those revenues. This will then show you whether you have a profit or loss. Knowing this information will help you to determine pricing, marketing efforts, and overall management of your expenses.
Cash Flow Statement: When you take the information from your balance sheet and the P&L statement, you are able to develop a picture of how cash is moving in and out of your business. Having a good understanding of your cash flow over time shows you the health of your business. No business owner wants to worry if they can pay their next bill. When you know what your cash flow looks like you are able to focus on growing your business and improving results.
We believe that small business owners are best served when they have a professional team in place to help them with their accounting matters. After all, you should be focusing on the things that got you into business in the first place. But, having said that, all small business owners should have a basic understanding of financial statements, how to read them, and how the information derived from them affects their business.