Posted 04 May 2020, Editor's Desk
3 most important financial statements for your Business
Trying to run a business without keeping a check on the Cash flow, Balance sheet and Profit and loss statement is like driving a car without the engine. It is critical to understand this concept to plan the future and manage your operations and taxes. It is also important to keep your financial health in check as your investors might ask for these statements at the time of fundraising and you don’t want to have enough cash in your business. Financial statements are the best source to evaluate the weaknesses and strengths of your company’s financial health.
Let’s understand each of these important financial statements in detail:-
1. Cash flow
7 out of 10 start-ups fail because of poor cash flow management. Running out of money is the most critical situation where most of the start-ups fail. You always need to know where the money is coming from and where the money is going. A Cashflow financial statement helps your business to identify the risks while moving forward. It also records all the relevant activities for the current period. Cash Flow management is the amount of cash collected and used by a company during a period and is one of the most important aspects to understand running a business. You are going to put your business in a very dangerous position if you don’t stay on top of your cash flow.
Let’s break down cash flow into 3 important financial statement categories:-
2. Balance sheet
The balance sheet reflects the financial statement of your company. It is a combination of your company’s assets and liability. If both assets and liability match then only your account is balanced. Let’s understand the balance sheet-
A balance sheet helps in determining the financial stability of your business. Investors and creditors always analyze the balance sheet of your company before investing. A balance sheet also indicates the unexpected expenses and your liquidity position.
Asset + Liability = Equity (It shows the basic accounting equations)
Look for these items when reviewing the balance sheet:-
Profit can be made when your revenue exceeds costs or expenses but if the cost exceeds revenue then a loss is projected.
The profit and loss statement records the performance of your business and shows the result if the company is financially healthy or not.
The profit and loss statement shows where the money is being allocated and also breaks down the business cost into categories for your financial statement.
Let’s look at the components of profit and loss:-
These Important Financial statements are critical to evaluate the performance of your business yearly. As a business owner, one must know the basics of these important financial statements to understand the monetary health of your company. It will also help you to take the necessary decisions on time.