Successful business owners use their financial statements to guide the management of their business. These statements show the flow of money into and out of the business, provide a snapshot of the business’s financial health, and guide the identification of trends within the operating activities. Without understanding them, it’s impossible for business owners to know if they are earning a profit or have the funds to keep up with their business expenses, as well as to plan for any future growth or opportunity.
No matter how big or small a business is, whether bookkeeping is done in-house or by an outside accountant, all entrepreneurs should be able to read and understand three main financial reports. Each one of these statements serves a different purpose, but taken together, they provide a clear view into a company’s operating activities.
- Balance Sheet
The balance sheet is a snapshot of the financial position of the company at a given point in time. This includes assets (what the business owns), liabilities (what the business owes), and owner’s equity (the owner’s stake in the business). The balance sheet reveals the current status of the business as of that date. While a single balance sheet won’t necessarily aid in the discovery of trends, comparing balance sheets from equal points in time (eg, quarter to quarter or year to year) can show how the business is faring.
- Income Statement
The income statement is the best view into a business’s bottom line, or net income, which is why it’s typically used to show lenders and investors whether the company has made or lost money during a given period. Income statements are also beneficial for the business owner because they show whether the company is generating a profit.
- Cash Flow Statement
The cash flow statement shows each of the company’s incoming and outgoing transactions over a period of time to provide a picture of exactly what happened to the company’s cash during that period. It provides an overview of what cash has been going in and out of the business that didn’t make it to the income statement. This statement shows potential stakeholders how well a business manages its cash flow and pays off its debt obligations. A periodic cash flow statement also helps a business anticipate borrowing needs.
Together, these three financial statements provide a view of how money flows in and out of the business and the context needed to ask the right questions. Understanding them is an important step in becoming a smarter, more data-driven business owner.
To learn more about using your company’s financial statements to identify relevant and significant financial measures requiring management action, consider registering for our upcoming workshop on Reading & Understanding Your Financial Statements or scheduling a one-on-one appointment with a business librarian or NaperLaunch coach.