Many entrepreneurs see financial statements as one of the most intimidating aspects of owning and running a business.
The problem is, financial statements are crucial to success:
- They tell you the performance and value of your company.
- They are the primary documents others (bankers, accountants, business partners, etc.) use to measure the health of your company.
- They, and other tools, help you manage your business, especially when you delegate and/or when you can no longer personally oversee all the details.
In short, financial statements wield a lot of power. But even if you aren’t a math whizz, you can learn what the three main statements bring to the boardroom table and show them you are in charge.
Want to make sense of your financial statements? Here’s a brief overview (links to more advanced info follows):
1. Income Statement (or Profit and Loss or P&L)
The income statement tells you the performance of your company. It shows the revenues earned and related expenses over a certain period of time, e.g., a fiscal year. This statement shows if you made a profit.
It answers the question: did my business make or lose money over a certain timeframe?
2. Balance Sheet
The balance sheet shows a picture of your assets and liabilities (debts) at a point in time.
It answers the question: what is the value of my company?
3. Cash Flow Statement
The cash flow statement reconciles the net profit from the income statement to the amount of cash the business generated for that same period of time.
It answers the question: can my business pay its bills?
If you haven’t already, it’s time to take control of your financial statements.
Check out this surprisingly humorous beginner’s guide to financial statements from the Security and Exchange Commission. And, take 11 minutes and 18 seconds today to watch the video below, Financial Statements Explained. It will help you learn what questions your statements answer, what they are designed to show you, and how to use them to plan for further success.