Financial Statements 101
“Have you reviewed your financials? No, I don’t know what they are telling me.”
As an accountant, I hear this all the time. The key to a successful business is to review financial statements routinely. Financial statements are formal records of a business financial position. The documents state the financial results, condition, and cash flow. At the minimum, financial statements should be created monthly.
These documents are needed to prepare tax returns, qualify for loans, and understanding the business financial health. The three financial statements are balance sheet, profit & loss statement, and cash flow.
In layman’s terms, here’s what they tell business owners:
Balance Sheet: What your business owns vs owe (your net worth)
Profit & Loss Statement: How much you generated in revenue and incurred in expenses
Cash Flow: Cash coming in and going out
So how are financial statements created? Unknown to many business owners every task within the business rolls into the financial statements.
Financial statements summarize financial transactions. They put transactions into categories so business owners know where the money is coming from and going out. How does one organize their transactions? There are several options:
Excel: If you are a starting off using an excel spreadsheet is an easy tool to get comfortable tracking cash in and cash out.
Software: Xero and Quickbooks Online are accounting software businesses use to collect their transactions. You can download your bank statement to the software and then categorize the transactions. Before entering your transactions you need to understand how to setup your chart of accounts, understand who’s a customer and vendor.
Notebook: Yes – there are still businesses who use paper! This option is not recommended. You can not efficiently track or store financial information. Also, you will then have to pay a bookkeeper or CPA a hefty price tag to turn the information into financial statements.
Once you collect all your financial transactions you must Create, Ask, Act.
Create financial statements
Ask questions: What expenses are over/under budget? What external factors affected the business i.e. weather or the passing of new law? Do I have any outstanding accounts receivable?
Act upon what the financial statements are stating: Maybe you need to increase cash flow at the beginning of the month to cover operating expenses.
Any sustainable business reviews their financial statements at least once a month. Setting aside time with your accountant should be as important when scheduling doctor’s appointment. Get started today!