Although you don’t need to be an accountant to run a small business, if you have the fundamental accounting abilities to assess your financial data, your company will have a far greater chance of surviving and thriving in this competitive environment.
You will have no notion what is working and what is not if you are unable to interpret your financial data. You should be familiar with the three basic financial statements as a small business owner: The Balance Sheet, Income Statement (Profit and Loss Statement), and Cash Flow Statement. Let’s get a basic sense of the terms first, shall we?
Balance Sheet Statement:
The balance sheet depicts the assets, liabilities, and shareholders’ equity of your company at a given point in time. It shows you what the company owns and owes, as well as how much the owners have invested. The balance sheet, on the other hand, shows what a corporation owns, owes, and invests in the long run. When a corporation records a sale or an expense for bookkeeping purposes, the transaction affects both the balance sheet and the income statement.
Income Statement:
The income statement (profit and loss statement) displays revenue, expenses, profits, and losses for a certain period. It shows you how profitable your company was throughout that time period. The profit and loss statement (P&L), statement of operations, or statement of income are all terms used to describe the income statement. It outlines a company’s trading transactions, such as income, sales, and expenditures, as well as the profit or loss for a specific time period. In simple terms, it depicts a company’s financial health.
Cash Flow Statement:
The cash flow statement depicts the amount of money made and spent by your company over a specific time period. It provides a solution to the issue, “Where did all of the money go?” Despite the fact that cash flow is critical to a company’s sustainability, small business owners frequently misunderstand and disregard cash flow statements. This statement shows the actual cash transactions, both arriving and departing, for a certain time period. Because it reflects the company’s financial stability, it is a key aspect of the financial reporting process. A company’s financial resources will quickly be depleted if it spends more money than it brings in. Use the cash flow statement to keep track of cash flow so you can spot problems before they become serious.
To understand the differences between the profit and loss account and the balance sheet, we must first understand what each term means. Both of these propositions are diametrically opposed. The assets and liabilities on the balance sheet are modified every time a sale or expense is recorded, affecting the income statement. The income and expenses recorded in the P&L will influence the amount shown as cash or in the bank under current assets on the balance sheet. When a company makes a sale, its assets increase and its liabilities drop. When a company reports an expense, it reduces its assets and increases its liabilities.
The P&L, on the other hand, includes interest payments on that loan in its expense column, and these statistics will have an impact on the company’s net profitability or ‘bottom line.’ There are, however, additional indicators of a company’s health. Money obtained through loans or stock sold to investors is not shown on the income statement.
Investors should look at a company’s balance sheet to see how well its management has used its debt and assets to create revenue that is then carried over to the income statement. Revenues and expenses should be closely monitored because they are both important for management to grow revenues while keeping costs under control.
Furthermore, investors should pay particular attention to the operating area of the income statement to see how well the company’s management has run it. To ‘get the pulse’ of a company’s business and ensure there are no irregular heartbeats that signal the business may soon be on life support, an investor should examine three financial statements: The Balance sheet, Profit and Loss Statement, and Cash Flow. Cash flow statements show not only how much money was made, but also how it was spent. It does not, however, take into account any outgoings or potential earnings.
Conclusion:
Even if you have a dedicated accounting firm or a private manager for all of these things, knowing the basics of these three statements would be a valuable personal asset in terms of skill-set because it would give you a good idea of your company’s current health and future potential. These three statements, taken collectively, are critical in determining how well the company is run and how efficient the organization has been overall.
