The Importance of Financial Statements for Your Small Business

Your small business seems to be doing fine. You have plenty of customers and your employees are working hard, yet your bank account is empty and you’re having problems paying the bills. On the outside it looks like everything should be terrific, but somehow it isn’t. So, what’s wrong? How do you figure out where all your money is going when it seems you have plenty coming in? The answer may be in your financial statements. It may be time to analyze the financial side of your business, and that’s exactly where financial statements can help you.

Financial statements are more than a simple listing of business income and expenses. Appropriately prepared financial statements can show you the cash flow of your business, any outstanding debts, and the value of your assets. Basically, once you do this, you’ll see that the total in your checkbook is not necessarily the income you have earned. There is far more to income than actual deposits in the bank.

To really comprehend where your business stands, it is critical to look at certain financial statements. Financial statements are generated by first organizing and then analyzing numbers from your accounting activities. You’ll want to start with the two primary financial statements, which are your Profit and Loss Statement, also called an Income Statement, and your Balance Sheet. After which, you may want to delve deeper, and look at your Cash Flow Statement, as that will show you exactly where your cash is coming from and then where it is going.

So, what you want to have is:

1. The Balance Sheet – this is a record of your business’s assets, liabilities, and capital, up to a specific point in time.
2. The Profit and Loss Statement (the Income Statement) – this is the summary of your business’s earnings, expenses, and net profit (or loss) over a specific amount of time.
3. The Cash Flow Statement – this will show the actual inflows and outflows of cash coming into and out of your business.

Depending on your specific business there are other financial statements that you may find helpful, but the above three will give you detailed information in which to begin. When you look at these financial statements, a lot of the mystery surrounding the finances of your business will disappear. In black and white, you will be able to see every penny that has come into your business and every penny that has gone back out.

Financial statements are only as good as the information that is backing them up. If you do not have complete accounting records, your financial statements will not be reliable. It is extremely important to keep accurate financial records when you run a business. This is important not only for the IRS, but for your own peace of mind, as well.

You will find that financial statements, when backed up with complete accounting records, will help you plan better. For today, for tomorrow, and for the years to come.