Financial statements are an essential part of small business finances. They provide a snapshot of a business’s financial health and performance. Each one provides valuable information that can be used to make decisions about the future of the business. Understanding these statements is essential for any business owner who wants to make informed decisions about their finances.
What are financial statements?
Financial statements summarize a business's financial performance over a specific period, such as a quarter or a year. These statements include three direct reports: the income statement, the balance sheet, and the cash flow statement.
1. Balance sheet. The balance sheet expresses the financial position of a business. It shows three things about a business’s financial health: its assets, liabilities, and shareholder equity (or capital). When combined, these three elements make up the worth of the business for the period the balance sheet covers.
2. Income statement. Also called the Profit and Loss (P&L) statement, the income statement helps determine whether the business turned a profit or loss for each period of time. An income statement summarizes a business’s profitability and financial results for a period. It focuses on revenue and expenses. This financial report shows what it costs to create your products and services and keep the business running. It is handy to compare how a business’s revenues increase or decrease over multiple periods.
3. Cash flow statement. A cash flow statement measures how well cash flows through a business to keep operations running, pay employees, pay bills, and invest in opportunities. It is the third primary financial statement businesses must produce. Cash flow statements enable the business owners and partners to understand how a business runs: if there’s sense, process, and predictability in the operations, and if the business is on solid financial footing.
Anyone can learn how to create and draw insights from a business’s financial reports. Investors, business owners, and managers need to understand the results and trends to drive the business successfully.
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