Financial Statements for a Small Business
Preparing and understanding financial statements for a small business.
Do you prepare financial statements for your small business?
What do you do with them after you prepare and print them out?
Are they stuck in a file never to see the light of day again?
If you have been following the last few months’ series on my monthly newsletter “Basic Accounting Help”…
you realize the importance of recording and tracking your income and expenses …
and understanding basic accounting concepts.
Now we are going to collect that information we have been recording in our accounting records and put it in “report” form. Then we can take that information and analyze it to see how our business has been doing and what direction it is headed.
The financial statements for a small business are the maps of your business. They show where you have been, where you are right now, and where you are going.
There are three main reports that make up financial statements for a small business.
- Profit and Loss Statement
- Balance Sheet
- Statement of Cash Flows
The income statement shows where you have been, the balance sheet shows where you are now, and the cash flow shows if you got the money to go where you need and want to go.
Importance of financial Statements for a Small Business…
Some of you are thinking you can figure all that out without going to the trouble of preparing financial statements for a small business. Good luck with that; however, let me give you some for instances where you might wish you had taken the time to prepare some financial statements:
- You get an unbelievable offer to buy your business…but they want to see your financial statements for the last 5 years.
- You find a piece of equipment at a ridiculously low price that you just have to have, but your banker wants your financial statements for the last 3 years first.
- You found a supplier that is going to be able to provide you with better materials at a cheaper price, but he wants to see a copy of your financial statements first.
- Your brother-in-law just won the lottery and wants to invest in your business, but his financial adviser wants to see your financial records first.
I could go on and on…but you catch my drift 😉
Financial statements for a small business are important!
I have a friend that goes to all the trouble to record her financial transactions in QuickBooks but has not taken the time to visit the report section and browse the unbelievable variety of reports in there. That’s like setting all the ingredients out to bake a cake and never putting it in the oven:)
Ok now that I have emphasized the importance of financial statements; let’s take a closer look at the 3 reports that make up financial statements for a small business.
We will start with the Balance Sheet. It is what most investors, bankers, suppliers, etc. will look at and analyze to determine if they want to do business with you. The balance sheet can also give you some valuable information about your business because it is a snapshot of your company’s worth.
Read this page to see a sample of a Balance Sheet and to better understand what an accounting balance sheet is and what it consist of.
Next is the Profit and Loss Statement (also called an Income Statement). This report will show how your business did in a specified period of time. It will also show you how much money you spent on expenses and if and hopefully how much profit you made in that time frame.
Read this page to see a sample of a Profit and Loss Statement and what this income statement consist of.
Last is the Statement of Cash Flow. It will show you and your investors the cash flowing in and out of your business. Most bankers and investors are going to want you to prepare one; however, if you have a very small business and none of your outside people are requesting it, you may not need to bother with the official formatted report until you get big enough for investors.
Note: For those who use the free spreadsheets from this site, I am in the process of building a new spreadsheet that will include a basic cash flow spreadsheet in it. See more details below.
Read this page for examples of a Statement of Cash Flow and the two methods for preparing one.
Now let’s briefly go over some things that you and your investors will look at in your financial statements for a small business.
In most accounting software you can print out comparative financial statements which compare a specified period of time to a previous period…or just pull out last year’s or quarter’s financial statement and compare it to your current one.
- Are sales better or worse?
- Are costs more or less (compare each expense)?
- Is your cash flow improving?
If you are a new business compare, your actual performance with your planned one. Look closely at your pro forma statements (Pro forma financial statements are forecasts of the financial position of a business at some defined point in the future.)
- Do you have less sales than you predicted…if so why?
- Where any expenses greater than you predicted? Is there a way to lower them?
Existing businesses can use their budgets to do this comparative analysis also.
Many bankers and investors will analyze your financial statements against others in your industry and their own set of standards. They make their comparisons by using some common financial ratios.
So in conclusion, understanding financial statements for a small business is imperative to the success of your company. Prepare them, print them out, and study them. If you need help it would be worth your time and investment to take them to an accountant or financial adviser the first time.
Remember the sky’s the limit when it comes to growing your business!