Home Entrepreneur A Guide to The Top Three Small Business Financial Statements

A Guide to The Top Three Small Business Financial Statements

Understanding these reports is key to understanding your business’ financial numbers.

April 20, 2021

4 minutes of reading

Comments expressed by Businessmen the contributors are their own.

Several times in my accounting and consulting career, I have had to explain very basic financial topics to people. the owners. I’ve talked to VPs of multibillion-dollar companies that they don’t understand and for new business owners who cannot understand why they have to pay taxes for a million dollars. Both scenarios highlight highly successful businesses that lack a simple explanation of what their numbers reflect.

Business owners are so busy running their businesses that it can sometimes be difficult to get a better picture of what’s going on. With so much information available to everyone online, it’s hard to refine it into useful knowledge. It is so easily consumed by details that we cannot see the forest for the trees. This is especially true in business accounting systems.

There are many useful reports for business owners to review to evaluate and better understand their business’s financial position. With cloud-based accounting, there are plenty of reports available. The problem lies in information overload: Which report do you choose, and which information is appropriate? Here are some quick tips for understanding the three key reports, how they relate to each other, and how to quickly apply them to your business.

Income statement

The Income Statement is probably the simplest statement to understand. That is that your business receives from selling products or providing services minus the costs your business incurs to provide those products or services. Remember that the income statement doesn’t include any loan or property purchases. Often times, what’s not included in the income statement is what the business owner needs to understand more about.

Accounting balance sheet

Your balance sheet is the second most familiar and useful report because it shows your balances in all of your accounts. Depending on your industry, this might include just your bank account, or it could be the backbone of the business if you have a lot of assets. Balance sheets are reported almost exclusively at cost. This means, for example, that if your business bought a stock 30 years ago for $ 500, it will still show up as a $ 500 asset, not at today’s market value.

Statements of cash flows

The cash flow report will give you an overview of how much cash goes into and out of your business without being included in your income statement. For example, if you take out a loan, then you will have a large deposit in your bank account; this is not however, so it won’t show up on your earnings report. The cash flow report will also let you know how much has been distributed to owners or investors as dividends.

Related: Visual guide for for Your Business (Infographics)

Bank Balance: Increase and Decrease

One of the most common problems I see is that business owners are unable to explain changes in their bank balance. Here are a few simple ideas to keep in mind: you use cash (decrease) to buy property, you get cash (increase) if you borrow and you can take or spend cash if you take in or distributing money to owners. For businesses without debt, the cash increase should be at least as large as net income.

Related: 6 things you didn’t know about your financial report

Simplify with KPIs

As a busy business owner, you don’t have time to navigate a lot of financial reports and try to understand what’s going on. You can get an intuitive sense of your business rather than relying on the accounting system. Connect visually and finance using Key Performance Indicators or KPIs. Your intuition may be good, but better if the numbers support it.

Many articles will explain income statements, balance sheets and cash flow statements and how to compile them. These articles are great, but most of them are too technical and not enough regarding the reality of what the numbers represent. Keep these simple concepts in mind as you decode your financial statements. Contact your return number Reality will give you a better understanding of your overall business without having to headache and think a lot about numbers.

Related: The numbers in your business plan



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