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When
it comes to financial information, many small businesses leave the basic
quarterly or annual statements to their accountants. Aside from dealing with
the daily financial and cash flow issues, owners can make the mistake of
neglecting valuable information—information that can be used to manage
their businesses successfully now and optimize its health in the future.
To
truly understand the current state of your business and to plan for the
future, you need to understand your financial statements. Financial
statements assist you to:
-
Identify
pitfalls and negative trends (too much or too little inventory, costly
distribution or a back-log of unpaid accounts receivable) in your
operations early on so that you can avoid a disaster later
-
Keep
an eye on your cash flow requirements and determine any financing needs
early
-
Monitor
your business’s financial health on a regular basis
-
Observe
periodic fluctuations in wealth
-
Check
your actual performance against your financial plan
To
fully understand the current financial state of your business, you need to
understand four basic types of financial statements and what kind of
information each one gives you. These are:
The
income statement. This
can also be referred to as the profit and loss statement, it is a report of
earnings or a statement of incomes and losses. This statement tells you what
income was earned, costs and expenses incurred and net profit during the
defined accounting period.
The
balance sheet. Here you
will find a company’s assets, liabilities and owner equity. The balance
sheet can be used as a statement of a company’s relative wealth or
financial position.
The
position statement. This
explains how a company spent and earned money. This statement may also be
referred to as “sources and uses of cash statement” or the “statement
of changes in financial position”.
The
statement of changes in owner’s equity. This
is used to clarify any discrepancies or changes in the amount of owner’s
equity from the beginning to end of a designated period.
Your
financial statements are just the beginning of your financial analysis. They
do provide important information but you are likely to have to dig a little
deeper than just the numbers. For example, you may notice a large increase
in expenses one month and
upon further investigation, you learn that the expenses were for inventory
in preparation for your largest buying season.
The
important thing is to use your financial statements as detectors. When used
properly they will set off early warnings of impending dangers.
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