After setting financial goals and a budget for your small business, it’s crucial to monitor how well your company is performing. Is it on track to achieving its revenue and profitability goals? Is it controlling its costs?
Even if you’ve contracted the help of an accountant, it’s helpful to develop your understanding of your business’s financial affairs. One way to accomplish that is to become familiar with and regularly review the following reports:
Profit and loss statement. Also called an income statement, your company’s P&L report indicates if your business is profitable and how profitable it is during a given period of time (such as for the past month, past quarter or past year).
A P&L statement is made up of the following main sections:
» total income;
» total expenses; and
» net income (income minus expenses).
It’s helpful to compare recent P&L info with that of a past period of time (such as a month this year with the same month last year) to identify if your company’s profitability is improving or if there might be some issues you need to address. For example, if your sales are up but your profits are down, you would want to investigate which costs have increased to the extent that they’re harming your bottom line.
Balance sheet. This provides a snapshot report of your company’s finances — assets, liabilities and equity — at a given moment in time. It summarizes what your business owns and what it owes. Investors who are considering funding your company will want to see your balance sheet before committing.
Most often, the report shows company assets on the left and liabilities plus equity on the right to represent the following accounting equation: assets = liabilities + owners’ equity.
The totals on each side should match, hence the name “balance” sheet.
Running this report at any time can give you helpful insight. Most business owners — sometimes with the help of accountants — review it at the end of a month, quarter or year.
Cash flow statement. This report sheds light on:
» when cash is flowing into your company;
» from where cash is flowing into your company;
» when cash is flowing out of your company; and
» from where cash is flowing out of your company.
It lists your incoming and outgoing transactions, showing how your business has earned and spent money over a period of time.
It’s valuable because even a business that shows a profit on its P&L statement can run into money problems if its income isn’t arriving in time to be able to pay employees or to cover bills when they’re due. By looking at your cash flow statement, you can detect gaps and start making changes so you’ll have sufficient cash reserves and avoid shortfalls that could hurt your ability to conduct business — and your reputation.
Money isn’t everything, but managing it isn’t optional.
By learning to read and interpret your P&L statement, cash flow statement and balance sheet, you’ll have a better sense of where you are on your course to meet your financial goals. The accounting software you use probably has these reporting options built into it, or you can ask your bookkeeper or accountant to run the reports for you. You also can find templates to create reports through the SCORE website.
To gain a better understanding of how to use the reports to manage your business, talk with your accountant and a SCORE mentor.