There are three financial statements you should regularly review:
- Balance Sheet
- Income Statement
- Statement of Cash Flows
Your Balance Sheet Is Your Present
The Balance Sheet is a statement that shows where you are right now. It’s the present. You can see how much money you have in the bank, at a certain point, how much you owe, how much other people owe – it’s all laid out. The Balance Sheet is most powerful when you compare it to other Balance Sheets. That comparison could be to Balance Sheets of related businesses or your own company Balance Sheets from other periods.
The comparison of Balance Sheets is generally done by comparing percentages. What ROI (return on investment) does each Balance Sheet show? What is the Quick Ratio? So it’s not so much about how much cash you have in the account, the issue is how much cash you have in relationship to your Accounts Payable.
Your Income Statement is Your Past
The Income Statement shows a time period for the income and expenses. It shows where you’ve been. It will also show a report of how divisions or products are doing (depending on how you code your bookkeeping).
The best strategy with your Income Statement is to look at your gross profit margin and your net profit percentage.
You can also use the Income Statement and Balance Sheet together to determine your inventory turnover.
The numbers on your Balance Sheet and Income Statement need to be turned into statistics to really give you the best forecasting ability.
These are the kind of stats that we pull together for you at Cash Flow Accounting with our customized Stats at a Glance monthly report. You don’t need to read all of the detail, just look at the stats that are most important for your business.
Your Statement of Cash Flows is Your Future
The Statement of Cash Flows tells you about the trends in your company. Cash is king, and yet most small business owners have no idea how their cash trends are going. Do they use or gain cash flow from Operating? Are their investments stagnating or about to? Is it time to pay off notes or look for new signs of financing before it’s critical? (The best time to look for money is when you don’t need it.)
Your financial statements contain all the information you need to start, grow and sell your business for top dollar. Do you know how to read the story of your financial statements?