The financial statements produced by your bookkeeper and/or accountant deserve much more than a cursorily glance before being tossed in a filling cabinet.
The numbers on these statements tell the story of your business and are much more than simply a snapshot in time. These statements are powerful financial diagnostic tools. With them, you can evaluate the strengths and weaknesses of your business on an ongoing basis and make financial adjustments as necessarily.
There are three main components to your financial statements — a balance sheet, an income statement and a cash flow statement.
- The balance sheet offers a snapshot of your company’s overall performance and categorizes your assets and liabilities at any given time. It acts as a barometer for the business’s overall financial health.
- The income statement summarizes your revenues and expenses, offering a clear, side-by-side picture of these important numbers.
- And since cash is king, the cash flow statement tells you just that; how much cash and cash equivalents flowed into and out of the business in a given period.
Beyond identifying potential shortfalls in revenues, these documents should be used as both forward-looking projection documents and as historical records to analyze past trends. Reviewing them frequently allows you to make adjustments to financial forecasts as needed.
Think about it: if your business needs to place a large order months in advance of selling that product — for example placing an order in July for Christmas stock — you need to be able to pay for it, or at least pay the deposit for it, months before making any profit off of it. By analyzing your financial statements, you can map out exactly how and when to make the payments so that there’s little financial hardship and no surprises.
Financial statements are just as important for service-based businesses with mainly fixed overhead costs, such as rent. They outline day-to-day costs, including when expenses are due and when clients are expected to pay. Keeping a close eye on financial statements ensures that those two lines don’t get out-of-sync because most businesses do not sit on a lot of cash, leaving little extra money for the unexpected. As a business, you’ll have little chance of success if you’re always wondering whether you’ll be able to complete payroll at the end of the week.
The most successful businesses are the ones that move beyond simply bookkeeping and understand how to use financials as a key business tool needed to thrive.