Ask SCORE: Three Basic Financial Documents For Business
In order to properly manage your business operation and develop ongoing strategies for growth, businesses need to have complete and accurate financial data. Making time to manage financial reporting, however, can be cumbersome for many small business owners. There are three financial documents, however, that should not be ignored: the balance sheet, the Profit & Loss statement (P&L) and the cash flow statement.
When you own a small business, there are deadlines to meet, customers to satisfy, orders to fill, products to ship – and a million other tasks to perform. Finding the time to manage both the business and finances can be overwhelming. Additionally, the use of spreadsheets for data monitoring may not be optimal for reviewing financials for operational and strategic purposes.
Therefore, making the time to manage financial information is an important function of running a profitable business. At a minimum, the three basic financial documents that provide important information should not be ignored – the balance sheet, profit and loss statement and cash flow statement. By keeping these statements up-to-date and within reach, you’ll always have a strong sense of the financial health of your business. Additionally, these documents provide information on net worth, revenues and expenses, and the amount of cash received and leaving the business.
The balance sheet is a point in time statement which details assets, liabilities and capital (owner equity) of the business. It provides detailed information on assets and expenditures over the preceding fiscal period. While Cash is considered the most important number, other information regarding accounts receivable, owned property and major liabilities are also critical. The balance sheet elements together provide the net worth of the company.
Profit and Loss Statement
The profit and loss statement, or P&L, is the income statement. It summarizes the business’ revenues and expenses during a specific period – usually by fiscal quarter and year. Specifically, the income statement provides information on:
Sales & Revenue – money taken in
Cost of Goods sold - money spent up front by the business in supplies and/or labor. In other words, the cost to provide the product/service
Gross Profit – money made after accounting for the cost of goods sold
Expenses - details on the money spent to operate the business.
Utilizing this information, the business can calculate critical information on gross profit margins, operating profit margins and net profit margins
Cash Flow Statement
Through analysis of cash flow documents, the business can monitor how changes in balance sheet accounts and income affect cash. The cash flow statement breaks the information down into three categories: Operating Activities which are those that generate income, Investing activities which are purchases or disposal of assets such as plant and equipment, and Financing activities which represent loan repayments or borrowings. In order to be a useful resource in managing the business, this statement is typically generated on a monthly basis. It acts as a bridge between the balance sheet and income statement as it shows how money moves in and out of the business. Additionally, 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 based on the balance sheet or P&L.
Together, these documents give the state of your business’ financial health. This information is the basis for making fact-based strategic decisions for your business. Additionally, these documents are a useful source of information in preparing the business tax return and are essential in the event the business requires additional funding.
A SCORE mentor can assist you through the process of setting up and maintaining your business’ balance sheet, P&L and cash flow statements. Contact SCORE to obtain more information on this and other pertinent business topics as well as to request mentoring assistance.
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Since 1964, SCORE “Mentors to America’s Small Business” has helped more than 11 million aspiring entrepreneurs and small business owners through mentoring and business workshops. More than 10,000 volunteer business mentors in over 250 chapters serve their communities through entrepreneur education dedicated to the formation, growth and success of small businesses. For more information about starting or operating a small business, call 1-800-634-0245 for the SCORE chapter nearest you. Visit SCORE at www.score.org.
Funded in part through a Cooperative Agreement with the U.S. Small Business Administration. All opinions, conclusions, and/or recommendations expressed herein are those of the author(s) and do not necessarily reflect the views of the SBA.