Small-business owners need to know much more than whether they are making a profit or a loss – they need to know why. Even if your company is doing well, you can’t optimize your financial performance if you don’t have informational accounting documents that give you adequate insight.
Understanding the basic features of financial statements companies use to keep track of their business performance will help you operate your business on a more sound footing, explains Inc. magazine.
What is a Balance Sheet?
The basic goal of keeping a balance sheet is to be able to find your company’s net worth at any given time. This will help you when you need to take out a loan, approach a partner, talk with an investor or meet with a potential buyer of your business.
The main features of a balance sheet are your assets and liabilities. Subtracting one from the other gives you your net worth. Try to keep your balance sheet current each month so you can see if your company is growing in value during the year.
You can create more detailed balanced sheets by breaking your list of balance sheet accounts into more categories. For example, you can categorize your liabilities as short- and long-term debts, and your assets as current (easy to quickly convert to cash) or fixed (long-term).
What is an Income Statement?
In addition to the value of your company, you’ll want to know if you’re making a profit each week, month, quarter and/or year, recommends QuickMBA.com. You can do this with an income statement, also known as a profit-and-loss statement.
This is a simple document that lists all of your revenues (not just sales), your expenses, your gross profits, taxes paid, selling and administrative expenses and your net profit for the statement period. This is one of the most important financial statements for a small business.
What is a Cash Flow Statement?
A cash flow statement is another document you’ll want to update at least every month. This financial document lets you know how much money you’ll be receiving during the month and how much you’ll have in bills that need to be paid.
This is different than just knowing that you are owed $X and owe $X. A cash flow statement tells you the dates you’re getting your money and the dates you need to pay your bill. If you know these exact dates, you can make sure you have the cash or credit to pay your bills.
Many small businesses get into trouble because they look at their sales and receivables and see that they have much more coming in than they owe – the problem occurs when you have payroll due and bills need to be paid to your suppliers before your clients and customers pay their invoices.
What is a Statement of Shareholder’s Equity?
This statement is important for publicly traded companies and is a required disclosure document under SEC rules. However, small-business owners can benefit from this financial statement, which shows the change in the value of an owner’s or partners’ stake in the business during a specific period.
The information for this statement is often found in the balance sheet, because it’s basically assets vs. liabilities, but for a specific time period, explains Business.com.