The Importance of Your Business Financial Statements

The topic of financial records or statements has always created some anxiety for entrepreneurs. For those individuals thinking of jumping into the world of business ownership, this can be a daunting part on the path to entrepreneurial success. Not knowing the importance and meaning behind each financial document can certainly set anyone up for failure. It is critical that you understand and address the reason and need for each financial document that is applicable to your business.

This topic is not going away. Not addressing the financial position of your business is like traveling without a GPS system in today’s financial world.

If you do not know what your ‘Profit and Loss’ Statement or ‘Break-Even’ point is, how do you expect to operate at a profit and be successful? This is like traveling blind. Your business cannot succeed if you are afraid to face this very important piece that is the heart and lifeline of your business.

During a monitoring period on said topic, the result concluded that many business owners and individuals who were considering starting a new business were failing to see the importance of these documents. Here are some recent Google searches on business financial statements or reports:

“why financial statements are important to small business”

“why are financial statements important for small business owners”

“why are financial reports important”

“why are financial records important to a business”

After reviewing the above internet searches, I thought back to many of the startup business owners I had interacted with over the years. I came to the conclusion that quite a few did not realize or understand the need for having current and accurate financial records. Often, many did not know what a ‘Balance Sheet’ looked like nor had ever used a ‘Cash Flow Statement’.

Types of Financial Statements or Records

When applying for financing for any number of reasons many business owners, start-ups included, do not respond to the request for the necessary financial records. These documents would assist in mitigating a financing source’s aversion to risk. The issue of not having proper financial records in place actually creates an issue in that the financier cannot complete their process and will not be able to approve your loan request.

Below are a few of the financial statements, or reports, you should have. If you have a need for an in-depth consultation, please contact your CPA or local area Small Business Development Center, Women’s Business Centers or SCORE office nearest you.

*Income Statement – This statement documents the income coming into your business and should identify the difference sources paying you.

*Cash Flow Projections – A Cash Flow Projection statement is a document that identifies in advance what you expect your business will do during a particular period, e.g.: one year layout of expenses per month.

*Cash Flow Statement – The Cash Flow statement is an ongoing document that you should use to track your month to month expenses.

*Balance Sheet – The Balance Sheet lets you know what your assets and your liabilities are, and how they compare to each other. This statement also calculates your networth.

*Profit and Loss – The Profit and Loss statement summaries the company’s revenues and expenses and compares them on year to year basis.

*Break-Even Analysis – The business’ break-even analysis determines the minimum amount of revenue the company must have in order to continue operations.

Conclusion

The importance of these documents to all businesses is vital. It is critical to note that many businesses are currently operating without properly documenting the money coming in and going out of the business. In order for any business to succeed, the health of the financial records must be in good standing. If knowledge is the issue, there are many local area organizations that offer business related courses for a minimal fee. Get the assistance you need. This will help you and your business stay compliant with the IRS while learning the proper art of financial record-keeping.