By Robert V. Burton
After setting financial goals and a budget for your small business, it is crucial to monitor how well your company is performing. Is it on track to achieving its revenue and profitability goals? Is it controlling costs?
Even if you have contracted the help of an accountant, it’s helpful for you to develop your understanding of your business’s financial affairs. Managing the finances of a business is just as important as getting on track financially when it comes to your own financial situation. It is important to consider your personal finances, as this will help you get in the right mindset when it comes to dealing with business finances.
One way to accomplish that is to become familiar with and regularly review the following three reports.
Profit and Loss Statement
Also known as an “income statement,” your company’s P&L report indicates if your business is profitable and how profitable it is during a given period of time, for example, the past month, past quarter or past year.
A P&L statement consists of three sections: total income, total expenses and net income ((your income minus your expenses).
It’s helpful to compare your recent P&L information with that of a past period of time (such as a month this year with the same month last year) to identify if your company’s profitability is improving or if there might be some issues you need to address. For example, if your sales are up but your profits are down, you would want to investigate which costs have increased to the extent that they are harming your bottom line.
Your balance sheet provides you with a snapshot report of your company’s finances – assets, liabilities and equity – at a given moment in time. It summarizes what your business owns and what it owes. Investors considering funding your company will want to see your balance sheet before committing.
Most often, the report shows company assets on the left and liabilities plus equity on the right to represent the following accounting equation: Assets = Liabilities + Owner’s Equity
Running this report at any time can give you helpful insight on your business. Most business owners – sometimes with the help of accountants – review it at the end of a month, quarter or year.
Cash Flow Statement
Your cash flow statement sheds light on: