There’s something a little crazy about driving cross-country without a roadmap or a map app on your phone. So why are you trying to grow your small business without knowing the lay of the land?
Financial statements are the roadmap for your business.
They tell you where you’ve been, where you’re at and a little bit about where you’re going. Learning to read these roadmaps is key to growing your business and making the most out of every hard-earned sale.
Are financial statements sexy? No, not so much. But understanding them will leave you better prepared to ask for a bank loan, plan your next launch or even decide whether you can bring on that new team member you’ve been dreaming of. More importantly, knowing the financial state of your business will help you make better business decisions now and in the future.
The four financial reports listed below are the top four reports you need to map the course for your business in the next couple months. So if you’re ready to be in charge of where your business is going, take a few minutes to learn a little bit about each of them. In the next four weeks, we’ll be taking a deep dive into each report so you actually know how to read them and use that information in your business.
Profit-&-Loss Report — Shows whether you’re actually making a profit or not.
The P-&-L report, also referred to as an income statement, tells you if your business is showing a profit and acts as a report card for your business. It shows where your hard-earned money is going and what kind of profit margins you have. This report is your primary performance indicator to answer the question, “How is my business doing?”
In a perfect world, you should review your Profit-&-Loss Report monthly to keep an eye on expenses and make sure you’re hitting your revenue goals each month.
Balance Sheet — Shows what you own … and what you owe.
The Balance Sheet is a mystery to many business owners, but it’s a great at-a-glance tool to knowing where your business stands if you know how to read it properly. Compare your cash and other assets against your debts and payables to know how “leveraged” your business is and whether a working capital loan might be in your future.
Ideally, you should review your Balance Sheet monthly to make sure your cash balance is where you need it to be and to keep your payables and short-term debts under control.
Budget-to-Actual Report — Shows if you are on course for your year.
The smart businessperson plans out their ideal year. The smarter business owner keeps track of whether they are meeting their revenue goals and expense targets for the year.
Cash Flow Statement — Shows whether your business has enough cash to keep running.
We saved the big guns for last … the cash flow statement. This report might be a bit tricky to understand, but it’s a goldmine of information. One of the most common reasons for small businesses to fail is a lack of cash. In the early years when your business is growing like crazy, you can show a profit on your Profit-&-Loss Statement but still have only a few pennies in the bank. This reports explains where all of your hard-earned cash has gone!
Reviewing your Cash Flow Statement monthly may seem excessive, but staying on top of your cash needs is your number one job as a business owners. Cash is king!
Now that you have a taste for what kind of information you could know about your business, are you excited? I hope so! In the next four weeks, we’ll be reviewing each of these reports in detail so you know what you’re looking at, how to read the report and how to use that information to make smart decisions for your business.
Deb Howard Greenleaf, EA, CEO and Principal, of Greenleaf Accounting Services provides virtual accounting and bookkeeping services and specializes in financial management to consultants, coaches, solo professionals, and other small business owners across the US. Deb is an Enrolled Agent (EA)—an IRS-licensed tax professional—and specializes in small businesses and entrepreneurs filing Schedule C or as an LLC. As an Advanced Certified QuickBooks ProAdvisor, Deb spends her day in QuickBooks Online and specializes in providing QBO support.