Understanding a business financial statement
Your income statement helps you assess the financial strength of your business. However, there are instances when this important financial tool is ignored. If you want to keep track of your business, it is important to keep balance sheet and cash flow statement in check. They are the statements that will enable you to get a financial view of your business. Business owners need to know how to interpret these business statements even if a bookkeeper already takes care of them. This way, you will know the fiscal position of your business.
What is an income statement?
Your income statement is the report card of your business. It can also be referred to as profit and loss statement. It provides you an overview of the performance of your business. The statement also shows the expenses incurred and the revenue generated. If you have a well-maintained income statement, it will reflect how your business is making a profit. It will also enable you to devise a plan that will increase profitability. Your income statement is important because it also gives you an idea of the amount of cash left to grow your business, cover any debt or pay your employees’ salary. Investors also use your income statement when assessing the risk level involved in extending credit or venture capital.
What can you find in the balance sheet?
If the income statement is your business’s report card, the balance sheet is its window. While most investors pay more attention to the income statement than the balance sheet, the latter can still be considered as a starting point when you decide on building the fiscal health of your business. Since it provides a summary of key financial information on a specific date, the information can be used as an indicator of your company’s liquidity and stability. The balance sheet will help you to determine if your company has the ability to fund business growth without necessarily seeking financial assistance from outside financing. The balance sheet shows the following information: assets, liabilities and equity.
What’s in a cash flow statement?
Cash flow issues can hurt your business. This is because cash may not regularly flow into your company. You may regularly pay your monthly expenses, but if customers do not pay on time, cash flow problems become inevitable. Your business may be profitable, but profit does not necessarily mean cash. You still need to generate enough cash so you can stay afloat. A cash flow statement helps you to monitor the flow of cash in and out of your company. The update is done on a daily, weekly, or even monthly basis. Your cash balance is determined when you calculate the operational costs, asset investments and financing.
Keeping an eye on your financial data will help you identify the business plan you need to create to keep your business thriving. Your financial statement enables you to forecast your company’s health so you can prepare ahead of time if the business takes a different direction.
