Now more than ever, a complete and accurate review of your finances may be necessary. Financial statements reveal, in real time, a snapshot of the financial health of your business.
If you have not previously generated monthly reports, and relied on your accountant to prepare the business financial statements at year-end for the purpose of tax filing, you may not have the necessary information you need to make informed decisions for your business, especially if you have been impacted by COVID.
Beyond providing real time information for the business owner there is a general purpose for financial statements, you may need to apply for a business loan or verify that the business has the financial resources to scale. It is a good idea to understand each section of the financial statement and how to use the information.
The income statement also known as a profit and loss statement identifies whether or not your business is generating a profit. Your revenue and expenses are categorized allowing you to review detailed information.
The main purpose of the business statement is to allow you to analyze the information to determine if there are areas you can adjust to increase your overall business profit.
If your revenue is less than your expenses, your options are to increase the revenue or cut expenses. The income statement alerts you to potential problems, that if caught quickly and adjusted as necessary, may save your business.
The balance sheet is a detailed overview of your businesses financial standing. Liabilities are subtracted from the assets and shows you if the business owns more that it owes.
Liabilities include credit card debt, loans, unpaid vendor invoices and taxes owing. The assets of the business include money owed to you from your customers, inventory, and cash in the bank.
The balance sheet information is generally used by banks and private lenders to determine if your business is in a good financial position to approve a loan.
The balance sheet also includes the equity of the business which represents the shareholders stake in the business.
Ultimately, a good understanding of your financial statements is important to your business. As a business owner you should make it a priority to have these two reports as up to date as possible. You will make more informed decisions and be prepared to make a loan application if the need arises as we continue to navigate a post COVID economy.