To help you better master your small business’s finances, there are three financial statements that every small business owner must understand; the balance sheet, Profit & Loss statement or income statement and cash flow statement.
Each of these financial statements provides specific information on your business from a different angle. It is important to understand them not just for the sake of it but because they are essential to your funding drive, and sustainability of your business.
The Balance Sheet which is also known as the statement of financial position measures the assets, liabilities and the shareholders’ equity of the business at a specific period in time.
It reveals what the small business owns, what it owes, and the value of the investment it has received from its owners.
As such, the balance sheet is made of three parts; Liability, Assets, & Equity.
The balance sheet is important for several reasons; it shows the type of funding that has been used to power the operation of the business whether debt or equity.
It is also an essential document needed by lenders to determine the likelihood that your business would receive funding among other benefits.
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Profit & Loss Statement
The profit and loss statement which is also known as the Income Statement, documents how a business has performed over a specific period in time.
Essentially, it indicates the income, expenses and loss that a business has experienced at a specific period.
There are four parts of a profit and loss statement; income or revenue, expenses, gains, and losses.
The profit and loss statement is important for several reasons but essentially, it reveals the efficiency and profitability of a business‘s operation.
Additionally, a P&L statement is essential when applying for business funding, because lenders will often review your financial statements, including the P&L. A positive P&L statement can be a big plus.
Cash Flow Statement
The Cash flow statement simply shows how cash moves in and out of a business over a specific period. It follows the movement of cash in and out of the business to help the business owner understand its cash position.
Some essential parts of the cash flow statement include Financing cash flow, investing cash flow and operating cash flow.
The cash flow statement is important because it reveals how much cash is available for the business to cover its expenses and meet its investing needs at a specific time.
It is not enough to know these financial statements or what they are used for, as a small business owner you must be able to read them and understand what they’re indicating about the health of your business to make changes necessary for the growth of your business.
Enrol for a business finance course today to help get a better understanding of the financial statements of your small business.