Every month you receive a financial statement in the mail from your accountant. As a small business owner, you may not be excited about crunching the numbers. You're excited about your business and want it to succeed. The numbers on your monthly financial statement are trying to tell you about the health of your business. Understanding these statements isn't boring once you realize that growing your business depends on those little numbers.
An income statement, or profit and loss statement, is the biggest indicator of your business's health. This is where you can find numerical amounts that allow you to measure your firm's profitability over time. Your revenue is the money your business has taken in. Subtract the amount of money that your business has spent from this principal amount. What you are left with is a number telling you how profitable your business has been that month. It is fun to compare revenue streams and fluctuations from month to month. These not only tell you about profitability but can also help you as a business owner.
• The income statement is a good way to track business trends.
• You may realize that your business is more seasonal than you thought.
• An income statement is also essential for tax purposes.
This information, when tracked throughout the year, can alert you to monthly income patterns. Being able to pinpoint months in which income dips compared to other months can help business owners diversify their business model to offer products and services that will be more profitable during those specific months. Your income statement will provide information for the entire year which is required when filing taxes for your business.
Taking an interest in the balance sheet is slightly more difficult. It's exciting that tracking the income statement can help you brainstorm ways to grow and diversify your business. The balance sheet really doesn't spur creativity. Nevertheless, it is extremely important. Why is the balance sheet so important?
The balance sheet shows these three things. Assets are what you own. Liabilities are debts. Equity is the amount you have invested in the business. The worth of your assets should equal the amount of liabilities and equity added together. The balance sheet shows where you stand in assets compared to liabilities and equity. Contact us for help understanding your business's financial statements.