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. 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:
• When cash is flowing into your company.
• From where cash is flowing into your company.
• When cash is flowing out of your company.
• From where cash is flowing out of your company.
It lists your incoming and outgoing transactions, showing how your business has earned and spent money over a period of time.
It’s valuable because even a business that shows a profit on its P&L statement can run into money problems if its income isn’t arriving in time to be able to pay employees or to cover bills when they are due. By looking at your cash flow statement, you can detect gaps and start making changes so you will have sufficient cash reserves and avoid shortfalls that could hurt your ability to conduct business and impact your reputation.
Money isn’t everything, but managing it isn’t optional
By learning to read and interpret your P&L statement, cash flow statement and balance sheet, you will have a better sense of where you are on your course to meet your financial goals. The accounting software you use probably has these reporting options built into it, or you can ask your accountant (or bookkeeper) to run the reports for you.
To gain a better understanding of how to use these reports to manage your business, talk to your accounting and a Charlotte SCORE mentor. You can also find templates to create reports through the Charlotte SCORE website.
Contact Charlotte SCORE by calling 704-344-6576 or visiting www.charlotte.score.org.
A Charlotte SCORE member for five years, Robert V. Burton has over 25 years of financial experience, most recently as president and chief operating officer of E*Trade Bank. He also served as executive vice president of Wachovia Bank and held positions with First Union Bank, Sears/PNC Mortgage and Banking Group and Bank of America.