Accurate and up-to-date financial statements aren’t only important for large public corporations. In actuality, they can hold the keys to success for small privately held businesses who invest the time and effort to use them well. There is no denying that there is work in keeping accurate records and making sure they are current, but the benefits are clear and undeniable. Before we examine the three ways that accurate financial statements can help your business, it is important to understand what those documents are and what information they convey.
Financial Statements to Consider
In general terms, financial statements provide a snapshot of the condition of your business, reflecting not only the balance of your accounts today, but what your expectations for tomorrow and beyond are. The three core financial statements that every small business should have are:
- Balance sheet – which shows the business’s liabilities as well as the owner’s equity, and provides a high-level view of the total assets under the control of the company at a specific point in time. It does not provide a history or roadmap of what has occurred leading up to that point in time, nor does it provide a way to project into the future.
- Income statement – conveys the profitability of a company in a given period of time. It is also known as your profit & loss statement and it captures the revenue earned and gains achieved by the company within a specified time period as well as expenses and losses for that same time period. Basically, it shows whether the business is bringing in more or less than is going out for a particular time period. Depending on your method of accounting, your recorded revenues and expenses may differ from actual cash receipts and expenditures.
- Cash flow statement – captures the money in and money out of a business during a defined period of time.
Each of these documents provides a slightly different perspective of how a business is doing. Looking at and understanding them in combination is the key to truly assessing the overall health and future prospects for a given business.
Why Statement Accuracy Matters
- Borrowing: Many businesses find themselves in need of loans or lines of credit to be able to manage through unexpected events or times of the year when cash flow may be slower than usual or when seasonal variances may reduce demand for the goods or services they provide. When this happens, having accurate financial statements ready increases the likelihood of being able to secure the capital required to ride out the irregularity. It may also decrease your costs to borrow.
- Growing: Investors are looking for ways to put their money to work for them so that they can realize a return. Having your key financials available lets potential partners or investors see where things stand now and how they got there. By being able to assess not only the snapshot of your balance sheet today but to also understand the trends of sales and expenses you may be able secure funding that would otherwise not have been interested. This ability to review your business from a more abstract vantage point can also help you to identify potential improvement opportunities in areas ranging from cash management to marketing schedules. If you can identify trends early, you have the potential to make decisions more quickly that will help you to shift around your own investments of time as well as cash.
- Managing: The construction and review of financial statements on a regular basis helps ensure that errors are caught early and can prevent or minimize the impact of fraud or embezzlement within the company. This regular cadence of monitoring is also a great tool for managing tax liability in a proactive manner. Being able to trust your books and make appropriate tax payments along the way can help ensure the stable operation of your business.
Understanding and managing your financial statements can be a daunting task, but the investment will help whether you want to maintain operations or take your business to the next level. For anyone struggling to get reports created or trying to make sense of what all the numbers mean, the support and services of a professional CPA can help.
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