- Understanding your financial statements is crucial for making good business decisions
- Many business owners avoid their financial statements because they lack the time to figure it all out
- There are three financial statements every business owner needs to understand
- We’ll help you get a better understanding of your statements so you have greater clarity in your decision-making
- This is the first of a 4 part series
When he’s not busy being a U.S. Senator from Nebraska, Ben Sasse is really good at teaching kids how to ride a bike. He describes himself as a “no training wheels” kind of guy. And even though his technique is unusual, it seems to actually work.
With the kid dressed in layers of heavy winter clothes (coats, ski pants, etc.) for padding, he sends them coasting down a long gentle slope while he jogs along straddling the back wheel. As the bike rolls along, he pushes the kid’s shoulders from side to side to force the bike to wobble but keeping it upright. Eventually, the kid finds their balance on their own. And once they “get it,” it’s as if a light switch is flipped that can never be turned off again.
Bikes and Balance Sheets?
As a small business owner (unless your business is a bike shop) you probably don’t normally associate learning to ride a bike with having a successful business. But over the next few weeks, we hope to show you just how connected those two things are.
If you learned how to ride a bike as a kid, you can probably clearly remember that “Aha!” moment when everything came together and you just rode. No more struggling. No more frustration. No more falls and bruises. You accomplished something that only minutes before seemed impossible. And in that moment, you found a whole new freedom.
Today, you may experience the same “pre-rider” frustrations when it comes to understanding your business’s financial statements. When you try to make sense of your balance sheet, your P&L, or your cash flow statement, you feel like that kid without training wheels who is hopelessly doomed to keep falling over. We want to make sure you don’t feel like that kid for much longer.
Many business owners get nervous trying to make heads or tails of these reports. As a result, they ignore them and choose to go with the “safer” option of just making sure the bank balance is positive at the moment.
The 3 Most Important Financial Statements
This article is an “Intro” to help you confidently read and understand the 3 basic reports that make up your business’s basic financial statements. Here they are with brief descriptions to give you a taste of what’s ahead:
1. Balance Sheet
If you ever took a beginning Accounting class, the first lesson you were taught is that everything in accounting has to balance. Asset=Liabilities + Equity. Your business’s Balance Sheet shows you at a glance a snapshot in time how everything is balanced.
- It will quickly tell you what you have, are owed, and what you owe to others.
- It shows how much you profited in total this year as well as how much net investment (equity) you have in the business.
- It tells you, in detail, how much money you have (checking, savings, etc) as of a certain date.
- It shows the value of your equipment and other assets as well as your payables and other liabilities.
Just like setting out on a long bike ride, to get to where you’re going you have to know where you are. This report gives you that starting point. A good accountant will say this is the basis for knowing if your books are correct. If this is correct, all of the other stuff may have items in wrong buckets but the buckets still have all the right info. This is the first foundation.
The balance sheet is the foundation for understanding your financial situation and making sure your books are accurate
2. Income Statement (P&L)
The Income Statement (also known as a “Profit & Loss Statement” or “P&L”) gives you a snapshot in time of sales (Revenue), expenses, and profits for a specific period – from daily to yearly and anywhere in between. It is an extremely versatile report that allows you to compare your current situation to previous months, quarters, or years. You can look at info for your entire company as a whole, or drill down to specific departments or categories. Once you “get it” on this one, you’ll wonder how you lived without it!
3. Cash Flow Statement
If the Balance Sheet shows you where your money is, the Cash Flow Statement shows you where all the money went. You may look at your income for the year and think, “Wow! We made a lot of money.” But then you check your bank account balance and wonder why it isn’t there.
This is the question we are asked the most – “So you say I made X dollars this year, but when I look in my bank account I don’t see the money. Where did it go?” Our answer is “let’s take a look at where it went.“ And we use the cash flow statement to find the answer.
Cash flow is nothing more than the movement of money into and out of your business. You may simply want to know if you can pay your bills on time. Whereas a creditor might be looking at your business to determine if you can repay a loan. No matter what decision you’re facing, this report can be a very valuable tool!
Don’t Be Scared to Ride (Or to Dive Into Your Financial Statements)
Just like a lot kids who are terrified to get on a 2-wheel bike, many business owners get really nervous when they try and make heads or tails of these reports. As a result, they ignore them and choose to go with the “safer” option of just making sure the bank balance is positive at the moment.
At Patrick Accounting, we’ve been teaching people to “ride” their financials like a pro for a long time. We are the experts who want to partner with you as an advocate to help you succeed. Once you’ve taken a deeper look at these reports with us over the next few weeks, contact us so we can help get you on the road to financial freedom.
So go pull your snow suit out of the attic and meet us back here soon. We’ll run along behind you and get you zipping down the road with a big cheesy grin on your face in no time!