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Understanding Financial Statements for Your Small Business

Understanding Financial Statements for Your Small Business
August 13, 2018 gnuworld
financial statements small business

If you want your small business to flourish, it’s essential you understand the information reported in its financial statements. This ensures you know your business’s financial position and can make sound, well-informed business decisions.

Financial statements are also the tools investors, banks and other lenders use to assess risk. They’re usually key in determining whether your small business qualifies for funding or a loan, and at what rate of interest.

Below we provide a simple introduction to each of three core financial statements. These statements indicate exactly how well your business is performing and can alert you if adjustments are necessary.

Income statements

An income statement shows:

  • the money that’s coming into your business as revenue
  • the money that’s going out of your business to cover expenses
  • whether you’ve generated a profit or loss over a specific period of time, usually a month, quarter or year.

An income statement provides a picture of your business operations, in broad brushstrokes. It tells you how much cash you have at your disposal to grow your business, cover debt or pay out to yourself and others as salaries. It can also help you determine whether it’s best to expand or contract operations so as to generate greater profits.

Income statement samples and templates

To get an idea of the typical layout of an income statement, try these samples and free income statement templates:

Balance sheet

A balance sheet is a detailed account of your businesses’ assets, liabilities and owner’s equity on a given date.  It breaks down exactly what your business owns in terms of inventory, tools, equipment, vehicles and property.

It also lists what your business owes, for example in the form of loan repayments, lines of credit, salaries, outstanding inventory payments or bond repayments.

Whatever is left over once all the liabilities are settled – in other words, the total of assets minus liabilities – is known as owner’s equity. This is the net worth of your business at a specific date.

A balance sheet provides an in-depth snapshot of your businesses’ financial stability, current and long-term debt, asset management strategy and liquidity. It’s the main financial statement that lenders use to evaluate business collateral and risk.

Balance sheet samples and templates

Samples and free balance sheet templates are available from sites such as the following:

Cash flow statement

A cash flow statement is a synopsis of the cash received and the cash paid out for a week, month or year.  In real terms, it shows exactly what money has flowed into your business account, what funds have been paid out and what’s left.

Unlike an income statement, which doesn’t take outstanding payments or unpaid expenses into account, a cash flow statement shows the precise amount of money your business has at its disposal at the end of a given period.

By reviewing cash flow data, you’ll know whether you have the available funds to pay salaries, settle outstanding accounts, buy inventory or plough funds back into the business. A cash flow statement will also alert you if you need extra capital to keep your business afloat.

Cash flow statement samples and templates

Samples and free cash flow statement templates are available from these sites:

At The Workspace, we focus on creating the ideal business environment in terms of convenience, collaboration and cost.  By signing up for our serviced offices or coworking spaces you’ll be able to grow your business and maximise profits at the same time.  Call us on 087 059 7777 today.

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