Many small business owners prefer brainstorming new ideas to poring over financial reports, but getting a handle on financial analysis can be remarkably empowering. Regularly reviewing your financial statements helps you assess and improve performance, avoid risk and make scalable plans for growth. Protect your company’s financial health by learning your way around these three reports.
Cash flow statement
The cash flow statement is arguably the most important report for small businesses, because a lack of available cash is one of the biggest fears owners have. It reveals precisely where you’ve allocated cash and whether you’re at risk of running out. Monthly examination helps you predict and forestall a cash crunch by tracking the flow of money for operations, investments and financing, whether your net operating cash flow is less than your after-tax profit (a sign you’re spending more than you earn), and seasonal trends so you can build a reserve.
Profit and loss statement
Your profit and loss statement (or income statement) summarises the revenue, costs and expenses incurred over a month, quarter or year. It typically breaks into three parts: your revenue (the top line); the total costs of doing business (operating expenses, research and development, and tax and interest); and your net income (the bottom line) – what remains once costs are subtracted from revenue. It can be used to calculate key metrics such as your gross profit margin, operating profit margin and operating ratio.
Balance sheet
The balance sheet summarises what your company owns (assets), what you owe (liabilities) and the current value to owners (equity). What’s being balanced is simple: the assets you own must balance against the money you’ve borrowed. Assets may include cash, short-term investments, accounts receivable, inventory, equipment and property; liabilities may include a line of credit, accounts payable, wages payable, rent, tax and utilities. Together with the other two statements, it gives crucial insight into your operations and performance.
Final tip
Have your accountant walk you through each report so you feel comfortable reviewing them independently and regularly. It’s well worth the effort – when you understand your key financial data, you pave the way to smarter decisions and more sustainable growth.