How to understand your business’ financial statements?

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For the non-CFO, financial statements can seem like a puzzle best left for the pros. But may be hiding between the numbers that, if discovered, can help business owners see their company from a different perspective and can help you make better money management decisions


What are financial statements? 

Financial statements tell you where you have been and how you did. Lenders and investors may ask to see your financial statements to gauge how your company is doing as they decide whether to provide funding. 

Many new business owners think that they can conduct their own financial analysis by tracking numbers in their head. But what they believe and what actually happens are often miles apart.   

There are three main financial statements for a business: the balance sheet, the income statement and the cash-flow statement. Let’s see how they work

The balance sheets 

It is a snapshot of your company’s current financial position. It’s a list of everything your business owns (its assets), as well as everything your business owes to others (its liabilities). When you subtract the liabilities from the assets, you’ll get the value that would be left over if you shut down and paid off the debts, also known as the shareholder’s equity

By tracking this information, you can see the overall financial position of your business and whether it’s improving over time. One way to think about tracking financial success is to aim to increase your shareholder’s equity by either building up your assets and/or paying down your liabilities. 


The income statement 

It calculates your business profits over a set period of time. It’s also known as a profit & loss (P&L) statement, because it shows whether you made a profit or loss. 

With this statement, you add up all your sales for the period, and then subtract all your expenses, like the cost of the goods sold, operating expenses (such as salaries and rent), interest paid on debt and taxes. Whatever is left is your profit. If it’s a negative number, you had a loss, typically shown as a number in parentheses. For example ($1,000) is a loss of $1,000. 

 

The Cash-Flow Statement 

The cash-flow statement is similar to the income statement, except it tracks your cash rather than profits. It’s possible for a profitable business to run into financial trouble because it runs out of cash, like if customers take too long to pay their invoices. After all, you need money on-hand to pay your staff, restock inventory and pay your vendors. With this in mind, you can say that the cash-flow statement is the most important of the three, especially for small businesses. The smaller the business, the more important cash flow is because smaller businesses often won’t have as easy of a time obtaining financing to smooth out fluctuations in revenue. 

Small businesses can also obtain greater control of their expenses and financial flexibility to take care of their cash-flow by using payment methods such as Corporate Cards. These tools give financing options, so the business won’t run out of cash.  

 

How to Create Your Own Financial Statements 

Depending on how complicated your finances are. For a smaller business, you may choose to build them yourself using spreadsheets, accounting software is also an option, and you can even consider hiring an accountant. Whichever approach you use, aim to review your statements regularly. This applies even if you hire a professional to build them for you. You can use them to track performance and also plan for the future by forecasting potential opportunities. 

 

Learn more ideas and inspiration to grow your business in Business Class Trends & Insightsand acquire the corporate cardsAmerican Express® Corporate Card Aeromexico or American Express® Gold Corporate Card Aeromexico that offer you special benefits for your Company. 

 

 

 

 


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