You don’t need to be a financial whiz to own a business…but you do need to have a basic understanding of these 3 key financial documents.
1. Balance Sheet
This financial statement is a snapshot of your assets and liabilities at a certain moment in time, for example, December 31, 2021. Assets include things like cash, investments, and property. Liabilities are things like loans and debt. Hopefully the assets are greater than the liabilities, which means you have a positive net worth. So, if you have bank accounts with $20,000 and a business loan of $3,000, your net worth is $17,000.
2. Income Statement
The income statement shows your business revenue and expenses over a period of time, say
one month or one year. Revenue is important, but not if your expenses are greater. For
example, a business that has $1,000,000 in revenue and $1,000,001 in expenses is actually doing WORSE that a business with $10,000 in revenue and $50 in expenses. The goal is to maximize revenue while minimizing expenses.
3. Cash Flow Statement
Ever heard of the Cash Flow Rollercoaster? Most entrepreneurs have ridden it, and it isn’t fun. Your Cash Flow Statement gives a detailed picture of what happened to your business’ cash during a period of time. This is to help you manage your bills. It’s possible to have a lot of revenue, but if it doesn’t come when your bills are due, you have a cash flow problem.
I don’t recommend creating these financial statements yourself. A good bookkeeper or CPA can prepare them for you, and help you understand them, so you can make the best business decisions possible.