To ensure that your business operates efficiently and that you make the right decisions for the future of your company, you need to understand your business finances. With modern accounting software packages, there is more financial data available to business owners than ever before. However, there are just a few key financial statements that you really need to understand as a business owner.
Every business owner should be able to read and understand the three key financial statements; the profit and loss statement, cash flow statement and balance sheet. The information contained within these key financial reports will allow you to understand how your business is performing at any given moment. Knowing where your business is performing well and in what areas you can make improvements is crucial to our future success. With this information, you can make better business decisions to guide your business towards your targets going forward.
Let’s take a closer look at the key financial statements that new business owners need to be aware of.
Profit And Loss Statement
A profit and loss statement, sometimes known as an income statement, summarises the income and expenses related to your business during a particular timeframe. Typically, a profit and loss statement is created at the end of each month and at the end of each financial year. Creating a profit and loss statement at regular monthly intervals allows you to keep track of your income and costs with more accuracy allowing you to make any changes to your pricing as necessary.
For example, if you notice that the costs of your raw materials are rising steadily from month to month, you can adjust your pricing accordingly. Having this foresight allows you to avoid any surprises down the line.
Cash Flow Statement
For business owners, the cash flow statement is an important financial document. Summarising all of the money coming into the business and leaving the business, it can help you to manage your cash better, to plan with more precision and to verify your profitability and liquidity positions. A cash flow statement will typically include cash flow related to the day-to-day business operational costs, investment activities and financing activities. The cash flow statement helps business owners to monitor how well the business is operating and can offer some helpful warning signs to help you avoid future financial misfortune.
As a new business owner, you should pay close attention to the financial health of your company. The balance sheet offers a snapshot of how the business is doing from a financial standpoint at any moment in time. Typically, balance sheets are created at the end of each month or the financial year. A balance sheet should outline the business assets like cash, stock, equipment, buildings and money, and also the liabilities such as loans, credit card debt and money owed to debtors. Taking these two figures, you can calculate the net worth of the business at any one moment so you always know where you stand.
Use Financial Data To Move Your Business In The Right Direction
Starting a new business is an exciting venture and you need to do everything in your power to ensure your new business is a success. As a business owner, it’s crucial that you can read and decipher the data contained within your financial reports. With this data, you will be better able to predict the future needs of your company and adapt accordingly. Having an insight into how your company is performing will allow you to allocate funds, personnel and resources to where they are most valuable. With a proactive approach to your business planning, you can be sure that your new venture is set up for success from the very beginning.