9 basic questions on small business financial statements answered.
1. What’s a balance sheet?A balance sheet is a snapshot of your business/s financial wellbeing. It shows your assets, including cash and receivables (money you’re owed), and anything you own with financial value, like equipment and real estate. It also shows your liabilities – the amounts you owe. You can calculate your equity in the business by subtracting liabilities from assets.
2. What are the most important numbers on my balance sheet?All the numbers are useful, but cash is king. A lot of cash, not surprisingly, can be a sign of profitability. You also want to pay attention to your accrual numbers, specifically your “current” and “noncurrent” items, which should be part of every well-organised balance sheet. Current items, like credit card payables and account receivables, should be reviewed regularly.
3. Can the balance sheet tell me if my business is doing well?A great way to determine your business’s health is to look at some key performance indicators (KPIs), which are usually ratios between numbers. These ratios, which can be calculated with the help of a financial advisor, can help you determine your ability to pay off current debt, how fast or slow your inventory is moving, and how long it’s taking to get paid by your customers.
4. What’s an income statement?An income statement is a summary of expenses and income during a specific period, usually a year. They exclude property and equipment expenses.
You can compare your income statements from different time periods to get great insight into the history of your business and what’s fuelling its success – or holding it back.
5. What are the most important numbers on my income statement?Generally, the cost of goods or services sold, gross profits and net income are the most important figures. Together, they indicate how your business is doing in terms of how much it costs you to create your products of services, and how much you’re spending on overheads (like rent and utilities).
6. Can my income statements tell me if my business is doing well?That depends on how well you’ve been in business and what stage you’ve reached in your business lifecycle. When you’re first getting started, losses may mean you’re making investments in the future – like setting up your website or putting money into product development. A mature company may experience periodic losses from investments, although you expect to see income as well. The most useful barometer of success is to compare statements from period to period so you can spot trends.
7. What’s a cashflow statement?A cashflow statement is a summary of how you spent over a given period. There are 2 methods for displaying cashflow: direct and indirect.
- The direct method shows all the outflows and inflows of money and doesn’t tie it to income or non-cash items.
- The indirect method gives you a more detailed view of cashflow. It starts with net income and shows all your non-cash items first, then shows cashflow. The statement of cashflow is broken into 3 sections to show where you are spending money: operations, financing and investing.
8. What are the most important numbers on my cashflow statement?The most important figure is cashflow from operations, or “cash burn”, which is how much you need to fund your business. Another key number is investments in property and equipment – they’re indicators of your long-term plans and investments in growth.
9. Can my cashflow statement tell me if my business is doing well?A cashflow statement helps you analyse where money’s coming from and where it’s going. It includes 3 sections:
- Operations, or money spent as part of normal, ongoing business expenses.
- Investing, which means money put back into the business, such as buying equipment.
- Financing, which covers loans and interest.