A Small Business Owners' Guide to Financial Reports
If you’re a new entrepreneur or small business owner, you may find the accounting process intimidating. Numbers are not for everybody, and looking at rows and rows of them on financial reports can be overwhelming.
The harsh truth is that as a business owner, you need to understand all the ins and outs of your financial reports. When you know everything about your current financial situation, you can then find ways to improve it and take it to the next level.
Your small business accountant generates three crucial financial reports that you need to know like the back of your hand: your balance sheet, profit and loss statement, and your cash flow statement.
When you understand these three reports, you are much more equipped to make intelligent financial decisions. Listed below is an overview of each report and how they impact your business.
1. Balance Sheet
The balance sheet shows the financial health of your company at a given moment. It summarises all assets, liabilities, and shareholders’ equity at the end of every accounting period. It’s a concise snapshot of all your resources and everything you owe. Balance sheets are the main report that lenders look at to determine a business’s creditworthiness.
Balance sheets are two-sided charts, with assets (current, non-current, intangible) listed on one side and liabilities (all financial obligations) and equity (investments and retained equity) on the other.
Accountants follow this formula: Assets = Liabilities + Equity. Therefore, each side of the balance sheet should equal the same amount.
2. Profit & Loss Statement
The Profit & Loss (P&L) Statement is also known as the Income Statement. It summarises the total expenses and revenue incurred by the business. It shows the profitability of a business over a specific period (one month, quarter, or year). The board of directors, investors, and even lenders depend on this statement to know if your business is profitable or not.
P&L Statements contain the following:
Revenue – The amount you bring in from sales
Cost of Good Sold (COGS) – Costs incurred when you sell a product or deliver a service
Expenses – All other costs incurred by business operations
Profit – The total amount left over after you pay off all business expenses
Your business’s net income is calculated through this formula: Income = Revenue – Expenses. This value determines your taxable income for the year.
3. Cash Flow Statement
The Cash Flow Statement is a summary of your business’s incoming and outgoing cash transactions. This statement shows how your business operates and where you’re making money.
Cash Flow Statements contain three sections:
Operations – Accounts receivable, accounts payable, inventory, and all other business functions necessary for business operation
Investing – Acquiring or offloading assets, long-term equipment, etc.
Financing – Acquiring and repaying debt
These separate sections will show you which areas of your business are using and generating the most cash. This snapshot of your cash flow can help you make future budgeting and other financial decisions to maintain long-term business growth.
Business owners and entrepreneurs don’t need to be financial experts, but they do need to be savvy enough to understand the most important reports that show how their business is performing. These three basic financial statements should be your basis for data-driven decisions that will take your business to the next level.
If you’re looking for a business accountant in the Gold Coast, New Wave Accounting is here for you. We can help you minimise tax and maximise profits. We have helped over 600 entrepreneurs and small business owners to start, grow, and scale their businesses through our accounting services. Book a free strategy session with our financial experts today!