Is your business about to flatline? Let’s examine the heartbeat of your financial statements and learn the benefits of understanding them
Have you ever given any consideration to the fact that businesses and people are similar? In order for humans to continue breathing, they must have oxygen and blood constantly flowing to the entire body, otherwise there’s a sure chance one could potentially see a flatline. On the other hand, in order for a business to survive and thrive, it must have cash or the business can flatline as well. Knowing your numbers is a necessary evil that comes with owning your own business.
Financial statements show the financial position of your company, they are used as a decision-making tool, are critical components of written business plans, and are usually required to get business loans or investment capital and they form the foundation for income tax returns. The statements convey to both management and interested outsiders an in-depth picture of the organization’s financial position and profitability.
Here are key reports to help aid the financial health of your business. Monitoring these reports can make the difference between failure and success to your business. These are the must-have reports that are critical to every business:
To view a “snapshot” of the assets, liabilities, and net worth of a business, look at the balance sheet. This statement displays what a business owns—its assets, what it owes, its liabilities—and what it is worth on paper. Since assets and liabilities can change almost daily, this financial statement is accurate as of its date only, making the strength and health of the small business clear and easily understood at that date.
Also called the profit and loss statement, the income statement displays the revenues and expenses of a small business over a time period. Unlike the balance sheet, which displays a picture of the business at a point in time, the income statement covers time frames, e.g., one month, four months, six months, or one year. This financial statement explains the success or failure of day-to-day operations, noting the revenues received and costs to operate the company to generate the reported income.
Statement of Cash Flows
Cash flow is often the most important component of having a successful small business. Projecting and recording the sources and uses of the cash a company receives is key to managing the businesses critical cash flow. For a newer small business, cash flow is more important than assets or profits. Unlike large corporations, small businesses seldom have “deep pockets.” The statement of cash flows benefits businesses by showing how much cash is flowing in, where it comes from, and how the business is using it.
Statement of Stockholders Equity
If you are a publicly held company, then you will also generate a statement of stockholders equity. Stockholders equity represents the ownership interests of a business entity’s equity owners, mainly the owners’ contributed capital, and the retained earnings that an entity has accumulated for its owners over the years. A statement of stockholders equity details the changes within the equity section of the balance sheet over a designated period of time. The statement is particularly useful for revealing stock sales and repurchases by the reporting entity; a publicly held company in particular may engage in these activities on an ongoing basis.
According to James L. Cousin II, CPA, M.B.A.; chief financial officer and vice president of Business Strategy of Association of periOperative Registered Nurses Inc., “Financials tell a story, especially when you have comparative financial results. They let you know how management is managing cash, how it’s growing, how they are using their assets and how they are being funded to operate (from its profits, from outside investors, or from debt). You can learn about the philosophy of management (how risk averse they are and their ability to grow).”