The financial statements of your business might seem like a routine pile of papers that lands on your desk at the start of each month. However, these financial statements can help your business avoid business failure with nearly 50% of small businesses failing by the fifth year (Oberlo). Understanding the valuable information the income statement, balance sheet, and cash flows tell you about your business’s financial health is critical to staying afloat, especially during uncertain times.
The income statement reports all of the income and expenses attributable to your business during a specified time frame, which is usually 1 year. This statement is essential to determine if you are generating a profit or loss and where you can make improvements. Investors and lenders will also be interested in the income statement before they give your business money, making it important to properly track and understand.
The next financial statement is the balance sheet. This statement tracks your assets, liabilities, and equity, which is all the money your company owns, owes, and has made in the past. Ideally, you want your assets to exceed your liabilities, indicating that you have the funds on hand to cover any obligations to investors, lenders, and creditors. Cash, accounts receivable, inventory, prepaid expenses, and fixed assets are all assets while accounts payable, accrued expenses, and loans are examples of liabilities. Tracking the balance sheet can help you implement effective cash flow management policies and improve your financial health through focused efforts on accumulating more assets and less debt.
Another common financial statement that businesses will issue is the statement of cash flows. This statement analyzes information from the income statement and balance sheet to reconcile the cash account from the beginning of the year to the end. Income or expenses from operations, investments, and financing are all presented and can give you clarity on what major expenses your cash was used for. This can help you make more informed business decisions going forward.
The income statement, balance sheet, and cash flows are three statements that can produce information regarding the financial health of your business. Creating accurate financials and comprehending key data points can be overwhelming for many small business owners with no accounting background. As a result, contacting a qualified accountant, like Tax Geaks, may be in your best interest to derive the most benefits from your financial statements. Contact a team member today for more information.