Many small business owners pay too little attention to their financial statements. Unfortunately, these owners don’t understand just what the statements have to offer. Small business owners should become familiar with three basic financial statements – Balance Sheet, Income Statement, and Cash Flow Statement.
When it comes to accounting, simplified is always better than complicated. If you are a small business owner who is unsure of the difference between the balance sheet and the income statement you are not alone. Here’s a way to distinguish them:
Balance Sheet. A balance sheet is a snapshot statement of financial position. This financial statement shows where your company is at on a particular date which is usually at the end of the accounting period (month, quarter, year). It is a listing of your assets and debts on the given date. Balance sheets that are a year apart offer a comparison of your financial position from one year to the next.
Income Statement. The job of the income statement is to show how your financial position changed from year one to year two. It reveals how many sales and how much expense was involved to accomplish the change.
Small business owners use a cash flow management process to monitor, analyze, and make adjustments to their company’s cash flow. For any small business, cash flow management can help avoid extended cash shortages caused by a significant gap between cash inflows and outflows.
Cash Flow Statement. A monthly cash flow analysis tells if the income generated produces sufficient money to pay for obligations. The cash flow statement reports the changes from one balance sheet date to another.
If you have any trouble making sense of your financial statements, contact your accountant. Any unanswered questions may prevent your complete understanding of your company’s financial situation. When you understand the numbers, financial statements become very useful. Accounting is like a foreign language. Learn to speak a little of it.