The majority of business owners look forward to receiving their monthly financial reports on how their firm is performing. Almost invariably, they immediately move to the financial statements & look at the bottom line and see what the net profit was for the month under consideration. Afterwards, they devote a significant amount of effort to analyzing sales volumes and margins, as well as to identifying anomalies in expense accounts. The fact that they are reviewing the financial statement, as well as other financial data, is commendable, but they frequently end their review there.
Because the balance sheet free values do not appear to fluctuate significantly from one period to the next, they are frequently overlooked. A deeper examination of the balance sheet as well as its relationship to the financial statements, on the other hand, can assist in answering the following questions.
Is The balance sheet a financial statement that shows how much money you have?
Consider your company’s financial statements as a view into the financial health of the organization.
Despite the fact that investors would also pay any attention to the financial statements, the cash flow is actually the ideal starting point for constructing an image of your company’s financial health and performance.
Why? We do this because, in contrast to the financial statements, which indicates profitability more than a period of time, the balance sheet highlights crucial financial information as of a specific date. Your company’s stability & liquidity, which are both significant variables in assessing your company’s capacity to keep itself without the assistance of outside financing, are both indicated by this metric.
The following are the components of the income statement:
An organization’s balance sheet is often prepared at the end of a specific time period, generally a month or quarter, and it contains the following information:
- “What do we have in terms of business assets?” Your company’s assets include not just what it owns but also what it controls and what it has in its possession, including such bank accounts or a vehicle that has been borrowed against.
- “How much do we owe?” says the narrator of this story. You owe money on loans, credit card debt, and other obligations, and you have liabilities.
- “What is left over after the owner(s)?” asks the narrator of the story. After you’ve paid off all of your liabilities, how much of the company’s assets do you still own?
- Using the information contained in your balance sheet, you can gain insight into the following things:
How much money is left in the bank after you close up shop?
Long-term debt is distinguished from current debt, which is sometimes known as “short-term debt.”
Aspects of asset management that are important to consider are asset effectiveness and cash ratio.
Use comparative data to see how cash, payable, equity, inventories, & retained earnings have changed over time.
An accountant can assist you in setting up and interpreting your first balance sheet, or you can use a commodity like Live Plan to start generating one for you. . If you still want to go with the first one, finding an experienced accountant has been made a lot easier with Ageras. Trusted by more than 200,000 businesses, Ageras has helped business owners finding the right accountants, tax advisors and more and if you are looking for bookkeeping and accounting services for your firm, we’d recommend Ageras.
A financial statement can appear to be overwhelming, as well as the format can vary greatly depending on the business type. It’s important not to be intimidated by the prospect of developing a balance sheet; it’s an important aspect of your business strategy and an extremely useful tool for managing your company.
How well-funded is your company’s financial position?
Rather than any other reason, cash flow problems are the leading cause of business failure. The reason for this is that cash does not always flow into your organization at the very same rate as it goes out of your firm! Your company may be successful while still experiencing cash flow difficulties. The income statement can tell you if you made a profit; but, it does not account for delinquent or missed payments, nor does it assist you in determining whether you generated enough cash to keep your business solvent.
Maintaining a cash flow statement will allow you to better understand and control the flow of money into and out of your company. Whether it’s a simple one-page worksheet or a more interactive report prepared with an accounting system like Fresh Books or a budgets and management reporting tool like Live Plan, the statement should be updated on a daily, monthly, or recurring basis.
However, while the statement of cash flows is frequently seen as the most significant financial report for smaller businesses, the three primary financial statements are interdependent. Making financial, investment, and managerial decisions for your company while taking a holistic view of them can be extremely beneficial.