Small Business News
Three Basic Financial Documents Your Business Can't Ignore
Published: Monday, March 18, 2019 8:00 am
In many ways, money is the language of business—but often it takes some time before entrepreneurs feel comfortable speaking that language. If you don’t develop some basic financial knowledge and understanding, 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 statements—Balance Sheet, Profit, and Loss (P&L) Statement, and Cash Flow Statement—business owners can stay in tune with the financial health of their businesses.
According to SCORE mentor Bruce Mitchell, “These financial statements are the keys to understanding any business. In a very precise way, you can 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 a view of your company's financial position (its net worth) by displaying what your business owns and owes.
P&L (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—typically a year or fiscal quarter. By reviewing your P&L, you can gain a better understanding of how your revenues and costs affect your 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 can be used to understand your business’s performance trends, which might not be evident using just your balance sheets and P&L statements.
As a small business owner, your company’s success can depend on you paying attention to these key financial 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 you in preparing your income tax return,” explains Mitchell. “Good financial statements are essential if you need additional funding for your business. Any lender will require these documents before providing additional funds.”
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 put you on—and make sure you stay on—the right track. But as a small business owner, you should have a basic understanding of what these financial statements are telling you about the well-being of your company.