Your Financials are the Key to Success
In my last column, I focused on businesses that are in transition and especially the CEOs who are trying to figure it all out. I summarized by suggesting that maintaining accurate business records and using the right, easy-to-use recordkeeping tools is a necessary and important part of running a successful business. This isn’t always an easy or straightforward process. But there is one very key item that rises to the top. That item is making time to manage your business’ financials. This can be hard for many small business owners.
When you own a small business, you have deadlines to meet, customers to keep happy, orders to fill, products to ship – and a million other tasks on your plate. Finding the time to work on your business and manage the financials can feel overwhelming for a lot of owners who are knee-deep in the day-to-day. Managing your business’ finances doesn’t mean drowning in spreadsheets.
Making the time to manage your finances is a part of what it takes to run a profitable business. At a minimum, there are three basic financial documents that you can’t ignore - your balance sheet, profit and loss statement and cash flow statement. By keeping these three statements up-to-date and within reach, you’ll always have a strong sense of the financial health of your business.
According to SCORE mentor and retired CPA Frank Curtis, “These financial statements are the keys to understanding any business. In a very precise way, you can determine if your business is growing and succeeding or failing.”
- Balance Sheet
- Your balance sheet is a snapshot of your business’ financials at any given moment and shows you if you’re in the red or the black. This financial statement lists your business’ assets, liabilities and equity. These elements together give you your company’s net worth.
- Profit and Loss Statement
- Your profit and loss statement, or P&L, is your income statement. A P&L summarizes your business’ revenues and expenses during a period of time – usually by fiscal quarter and year. This is the financial statement you’ll use to understand how your revenues and costs impact your profitability.
- Cash Flow Statement
- Your cash flow statement shows your sources of incoming and outgoing cash over a period of time. Cash flow documents are helpful when assessing performance trends and other aspects of your business that wouldn’t be as evident if you were evaluating your business only on the basis of the balance sheet or P&L.
Running a business without regularly reviewing these three financial statements is the equivalent of driving a car blindfolded. Together, these documents give you the state of your business’ financial health. Without that information, you have no basis for making fact-based strategic decisions for your business.
“If you review your company balance sheet, you can learn how much cash you have on hand, how much you owe, and how much equity you have in the business. Your annual profit and loss statement will tell you if you have made a profit and how much. It will also assist you in preparing your income tax return,” explains Curtis. “Good financial statements are essential if you need additional funding for your business. Any lender will require these documents before providing additional funds.”
I suggest that businesses use an accounting software that will make this process much easier and save time doing it. Setting up and maintaining your business’ balance sheet, P&L and cash flow statements is easier with the help of someone well-versed in business finance, like a SCORE mentor. A SCORE mentor will help you set up and manage these three critical financial documents, so you have a clear understanding of the financial state of your business at any time.
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