The Importance of Financial Statements

Small business owners who are keeping a close eye on their financials will always perform at a higher level than those who don’t. Having a handle on your financial performance gives you the means to respond to cash flow needs, inventory shortages, and even employee inefficiencies with timeliness and precision.

You can also leverage your financial statements with investors and creditors to upscale your business with confidence. When you have a data-driven track record to share, you boost your business’s perceived value and reliability. Financial statements essentially make it easier to predict future performance and plan ahead.

The two most powerful financial statements at your disposal are the profit and loss statements and your balance sheet.

Profit and Loss Statements

Simply put, your profit and loss statement is a document that displays how your business is doing at turning revenue into net income. Your bookkeeper or accountant traditionally runs a profit and loss statement on a monthly basis. You can also customize these reports to display previous monthly, quarterly, or yearly data. Watching your business grow over time is one of the most satisfying features of the profit and loss statement.

The profit and loss statement itself records all the expenses from the income during a specific accounting period. You can get as general or nitty gritty as you’d like here. It’s all up to the numbers you’re looking to manage and where you want to go as a business. 

The profit and loss sheet is specifically organized into several sections. In the first section, you’ll see the cost of sales subtracted from the revenue of your business. This will give you your gross profit. The next section will show your operating expenses deducted from the gross profit established in section one, leaving you with your operating profit. The third section displays your non-operational revenues and expenses. Finally, the total profit or loss will be displayed at the bottom of the statement.

Balance Sheets

Like the profit and loss statement, the balance sheet delivers crucial financial data for your business that can be used for planning purposes. The balance sheet provides key information regarding your asset investments, as well as your outstanding debt. Think of the balance sheet as a broader snapshot of your business’s financials at a particular moment in time. 

The balance sheet relies on the tried and true accounting formula: Assets = Liabilities + Equity. Your assets are what you use to run your company, while your liabilities and equity are the moving parts that make up your assets. Ideally, these financial components should be in balance, hence the name of the statement.

Depending on the type of business you own, the types of assets, liabilities, and equities that appear on a balance sheet will look different, but you’ll always have something represented in these categories. By closely examining your balance sheet, you can determine what accounts are most easily converted into cash (most liquid) for your business. This information can then be used to convince investors or creditors to take a chance on your business’s future.

In Short

No matter what stage your business is in, make sure you’re running financial statements often and using the information found within them to make calculated, valuable decisions. Using your financial statements to become intimately familiar with your business is an excellent way to confidently make data-driven decisions that allow you to grow.