As a business owner, you have to wear so many hats. Not only do you handle the production process, you also take care of what is arguably the most important aspect of business: finances. Keeping a vigilant eye on expenses and income is crucial, so is assessing your financial health. They help you predict your business development in the future. Below are the three financial tools and documents that you need to know and prepare to keep your SME financial statements in order.
An income statement is a business’ report card. It is also referred to as a profit and loss statement that is useful to provide an overview of how a business is doing over time and breaks down generated revenue and incurred expenses. If you maintain good numbers on your income statements, then the numbers reflect the profitability of your business and will inform you which areas to work on to increase profitability. You can either focus on profitable product lines or curb unnecessary expenses.
Your income statement will also be used as an assessment tool when you apply for financing. Investors will look at your income statement alongside your business plans to decide whether they want to extend capital to your business. So make sure you have income statements prepared regularly, ideally monthly.
The balance sheet is a window into your business’ financial strength. At its simplest level, the balance sheet indicates stability and liquidity, important factors that determine a company’s ability to fund its own growth without outside financing.
A balance sheet contains three components:
Business assets – What a business owns, what it possesses, what it controls.
Liabilities – A company’s debts, loans, outstanding credit card payments, etc. are included.
Owner’s equity – How much assets you still own once you’ve paid off all your debts and liabilities.
The format of balance sheets differs depending on your business type. If you can afford it, get an accountant to help you set up and interpret your first balance sheet as this financial document is extremely helpful in running your business and determining financial health.
Cash flow statement
Many small businesses fail because of cash flow issues. Having an income statement is not enough to help you determine whether you have actually generated enough cash to stay afloat or not. You need to create cash flow statements in order to understand and manage the flow of cash in and out of your business.
The basic formula for calculating your end balance is:
Operational Costs + Asset Investments + Financing = Cash Balance.
Operational cost is your net income and losses minus your regular expenses; it becomes a number that will help you assess business growth. Asset investments reports both inflows and outflows from purchases and sales of long-term business investments such as property, assets, equipment, and securities. The final element, financing, is the cash you received as a result of business loans, line of credit, or other capital infusions.
Understanding how to keep your small business or SME financial statements in order will help carry your business to success. Pay attention to details and take the time to prepare and create financial statements periodically.