In many ways, money is the language of business. Yet it often takes some time before small business owners feel comfortable in understanding and speaking that language.
If you don't develop the basic financial knowledge and understanding of your operations you risk missing red flags that might indicate problems with how you're managing your business and its money.
With the help of three key financial performance statements: balance sheet; profit and loss (P&L) statement; and cash flow statement small business owners can stay in touch with the financial health of its business.
You don't necessarily need to be an expert in financials to successfully manage and grow your business. In fact, you should consider periodic consultations with an accounting professional to educate you on understanding these three financial performance measures, and to insure you stay on the right track. As a small-business owner having a basic understanding of these financial performance measures will keep you on top of the financial health of your business.
According to Frank Curtis who is a SCORE mentor and retired CPA, "These financial statements are the keys to understanding any business. You can precisely determine if your business is growing and succeeding or failing."
This financial statement lists the assets, liabilities and equity of your company at a specific point in time. Its purpose is to provide you a periodic view of your company's financial position (net worth) through displaying what your business owns (assets) and what it owes (liabilities).
Profit and Loss Statement
Also known as an income statement, the profit and loss statement is a financial statement that summarizes your business's revenues and expenses during a period of time. It's a good practice when starting out to complete the P&L statement each month, or at a minimum on a quarterly basis. By reviewing your P&L you can gain a better understanding of how your revenues, cost of goods sold, labor costs, and all other expenses affect profitability.
Cash Flow Statement
This financial statement enables you to see your company's sources and uses of cash over a specified period of time. It's usually the statement business owners find most difficult to understand. It can be used to determine your business's performance trends which may not be evident using your balance sheets and P&L statements.
"If you review your company balance sheet, you can learn how much cash you have on hand, how much you owe, and how much equity you have in the business. Your annual profit and loss statement will tell you if you have made a profit and how much. It will also assist in the preparation of your income tax return," explains Curtis. "Good financial statements are essential if you need additional funding for your business. Any lending institution and most outside investors will want to review these documents to determine its risk before providing additional funding."
• Fox Valley SCORE provides free confidential mentoring to clients in 17 locations throughout DeKalb, DuPage, Kane, Kendall, McHenry and Will counties. If you need help with existing business challenges, or are thinking about starting a new business, visit our website and click the red "Book Now" button. You can also click on "Workshops & Events" to register for one of the many free workshops throughout the year. The website is: http://foxvalley.score.org/