Simplifying Financial Statements for Your Small Business
Every small business is different, and the financial statements will be customized to fit your needs. But some basic principles apply to all companies: understanding how they work, where you can find them, and how to interpret them. In this article, we’ll review the basics of creating financial statements for your small business.
What Is A Financial Statement And Why Is It Important?
A financial statement is a snapshot of your company’s finances for the year. It can be beneficial to see how you’re doing financially, what areas are profitable, and where there might need improvement. Most entrepreneurs will think, is a tax preparer near me or an accounting firm simplify this matter for my business? You should create one annually if you have a small business.
Let’s cover some basics that apply to all businesses no matter their size or revenue – understanding them, where they come from, and who usually has access to them.
Understanding The Basics: There are three primary types of companies: profit-and-loss statements, balance sheets, cash flow statements. All three offer essential insights into an organization’s health and performance, but each tells us something different.
To Find Them: Financial statements are typically found on a public company website or can be downloaded from an organization’s financial report, which is usually available in pdf form online. If you’re unsure where to find your financial statement, ask someone at your company who should know – like your accountant!
What They Mean And Who Knows About Them: profit-and-loss statements show how much money came into and left the business over a specific period, including sales revenues, expenses, taxes, and any other funds coming or going with no changes made for inflation.
Balance sheets show what people own after subtracting their debts; cash flow statements tell us whether there was a positive or negative flow of money over a specific period.
Review financial statements to see how you’re doing financially and what areas need improvement. Remember that these are just the basics – every small business is different, so your statement will be customized to fit your needs.
How To Read A Balance Sheet
The balance sheet is the financial statement that breaks down a company’s assets, liabilities, and equity. Assets are things like cash, machinery, or vehicles. Liabilities include debt owed to others by the business, such as loans or pensions.
Equity is made up of contributions from people investing in your small business plus any retained earnings (money left over after paying for expenses).
The balance sheet also includes details about what these different types of resources can be used for–whether it’s expansion into new markets or just day-to-day running costs.
The balance sheet is a great way to get an overview of the financial health of your small business. It can also be used as a template for projects that you would like to undertake or profit margins from operations. In addition, you’ll need this information when planning future investments, and it will come in handy when negotiating with lenders about financing options available.
Understanding an income statement is an essential step in understanding the balance sheet. From there, you can use a cash flow statement to see how your business is doing and where it’s going.
To read the balance sheet, you’ll need to know how each of these items should be classified. Some common ones include fixed assets (e.g., buildings or equipment), inventory, and financial instruments (like stocks).
Of course, this can all get complicated, so it’s best not to worry about them too much if your small business is just getting started–you’re better off asking a professional for help when you have more questions! That said, understanding this information will increase your knowledge on running a successful enterprise in the future.
Why Your Business Needs More Than One Financial Statement
You may be wondering why your business needs more than one financial statement. There are two main reasons for this: (a) you need to know how much money is coming in and where it’s going out, and (b) the numbers might not add up.
For example, if you’re a plumber who makes $20 per hour but spends an additional 20 minutes on each job site because of unforeseen circumstances beyond their control, then your income will decrease by $30 every day at best- or worse yet, $45. So you’ll have two conflicting statements that don’t line up with reality.
As mentioned above, there are times when having multiple sets of accounts can provide valuable insight into the operations of your small business.
How To Simplify Your Financial Statements
To simplify your financial statements, you’ll need to automate the process of pulling in transactions from various bank accounts into one central place.
You may skip the hassle and hire a qualified CPA or accountant for your small business. They can do the work for you, and you’ll have financial statements that are accurate and easy to read.
- Summing up the information on your balance sheets helps answer questions like “Do I need more capital?” or “Is this investment worth it?”.
- Income Statements show how much money is coming in each month from all of your revenue sources (and their corresponding costs). If they don’t add up, then there’s a problem somewhere; take time to analyze every line item so that you can rectify any issues as soon as possible.
- Cash flow analysis helps determine whether or not something will be profitable by looking at whether cash flows into or out of your business over some time.
- For example, if you are a plumber and always use cash-on-hand for vehicles, tools, and supplies before your paychecks come in, then you may be operating at an unsustainable level.
Final Words
Small business owners need multiple sets of financial statements because sometimes they don’t line up with reality. Simplifying them by automating the process can help give small businesses clarity into their operations while saving time otherwise spent performing tedious accounting duties yourself.
