The basics of reading financial statements for small business owners
Are you a small business owner who is looking to get a better understanding of your company’s financial statements? If so, you have come to the right place! In this blog post, we will discuss the three most important financial statements for small businesses: the balance sheet, the income statement, and the cash flow statement. We will also provide tips on how to read these statements and what they mean for your business.
Balance sheet statement
The Balance Sheet is the first financial statement you should analyze. This statement shows your business’s assets, liabilities, and owner’s equity. Assets are the items that your business owns, such as cash, inventory, equipment, and buildings. Liabilities are the debts or obligations of your business, such as accounts payable, loans, and salaries owed to employees. Owner’s equity is the difference between your business’s assets and liabilities.
Income statement
The Income Statement shows your company’s revenues, expenses, and net income over a specific period of time. Revenues are all sources of money coming into your business, such as sales or services rendered. Expenses are the money that goes out of your business, such as rent, taxes, and payroll. Net income is the amount of money that is left over after all expenses have been paid.
Cash flow statement
The Cash Flow Statement shows how much cash is flowing in and out of your business over a specific period of time. Inflows are sources of money coming into your business, such as customer payments, investments, and loans. Outflows are sources of money going out of your business, such as payroll, taxes, and expenses.
How to read financial statements
Now that you understand the three most important financial statements for small businesses let’s discuss how to read them. First and foremost, it is important to remember that all financial statements are prepared in accordance with Generally Accepted Accounting Principles (GAAP). This means that the information included in each statement must be accurate and reliable.
When reading a balance sheet, you should look at the total assets, liabilities, and equity to get an overall picture of your business’s financial health.
As you review the income statement, you should focus on the revenue and expense categories to get a better understanding of where your business’s money is coming from and where it is going.
The cash flow statement will help you to analyze both inflows and outflows to determine how much cash your business has available for operations.
By taking the time to read and understand these financial statements, small business owners can gain valuable insights into their company’s financial health. This knowledge can then be used to make informed decisions about the future of their business.
The last step in learning how to read financials for a small business owner is to take action. Knowing what all of these documents mean and understanding their implications is one thing, but it’s important to use this knowledge to make informed decisions about your business. Reviewing these financial statements regularly will give you valuable insights into the financial health of your company so that you can decide when and where to invest for growth or save for potential downturns.
If you need assistance, reach out to us, and we will provide guidance. We offer comprehensive accounting and bookkeeping services and can help you understand your financial statements.