In many ways, money is the language of business—but often it takes some time before entrepreneurs feel comfortable speaking that language. If you don’t develop some basic financial knowledge and understanding, you risk missing red flags that might indicate problems with how you’re managing your business and its money.
With the help of three key financial statements—Balance Sheet, Profit and Loss (P&L) Statement, and Cash Flow Statement—business owners can stay in tune with the financial health of their businesses.
According to SCORE mentor and retired CPA Frank Curtis, “These financial statements are the keys to understanding any business. In a very precise way, you can determine if your business is growing and succeeding or failing.”
This financial statement lists the assets, liabilities, and equity of your company at a specific point in time. Its purpose is to provide a view of your company's financial position (its net worth) by displaying what your business owns and owes.
P&L (Profit and Loss Statement)
Also known as an income statement, the profit and loss statement is a financial statement that summarizes your business’s revenues and expenses during a period of time—typically a year or fiscal quarter. By reviewing your P&L, you can gain a better understanding of how your revenues and costs affect your profitability.
Cash Flow Statement
This financial statement enables you to see your company's sources—and uses—of cash over a specified period of time. It can be used to understand your business’s performance trends, which might not be evident using just your balance sheets and P&L statements.
As a small business owner, your company’s success can depend on you paying attention to these key financial statements.
“If you review your company Balance Sheet, you can learn how much cash you have on hand, how much you owe, and how much equity you have in the business. Your annual Profit and Loss Statement will tell you if you have made a profit and how much. It will also assist you in preparing your income tax return,” explains Curtis. “Good financial statements are essential if you need additional funding for your business. Any lender will require these documents before providing additional funds.”
You don’t necessarily need to be an expert in financials to successfully manage and grow your business. You should consider periodic consultations with an accounting professional to put you on—and make sure you stay on—the right track. But as a small business owner, you should have a basic understanding of what these financial statements are telling you about the well-being of your company.
If you would like to discuss this or need help with the Business Plan, contact the Sandhills Chapter of SCORE “Counselors to America’s Small Business”. SCORE is a nationwide nonprofit association of expert business counselors who provide free and confidential business counseling to small business entrepreneurs and owners. Your local Sandhills Chapter is very active in counseling, mentoring, and presenting free business seminars at Sandhills Community College. Please contact us at www.sandhills.score.org or call 910-420-0121 or 910-692-3926.
Also, you can send your business questions to firstname.lastname@example.org, and don’t forget to provide a way to contact you. We may not be able to answer all of your questions but everyone will receive a personal response from one of our Sandhills SCORE counselors.
P.S If you are interested in becoming a SCORE Counselor, please call or email us.