What’s the Deal with Financial Statements? What You Need to Know

Even if you weren’t an accounting major in college, you’ve probably heard of the three most common financial statements: the balance sheet, income statement (also known as a profit and loss statement or P&L), and cash flow statement. But even if you know of them, it doesn’t mean you’ve ever personally created one before. In reality, though, there are several reasons why you - as a small business owner - should create and review these reports. Let’s talk about these reasons.

What Purpose Do Financial Statements Serve?

You may be wondering why financial statements are necessary. In fact, each one serves a different purpose and looks at your business from a different perspective or vantage point. And although all three of the statements are generated from the same data, they speak to one another (for example, some numbers that appear on your P&L also show up on your balance sheet and in your cash flow statement). Separate yet integrated, together they tell the full financial story of your business. By knowing this story intimately, you can make smart business decisions.

Which Statement is Arguably the Most Important?

If we had to pick one statement as “the most important,” it would be the balance sheet because this statement shows the true financial health of the business. Despite this, many small business owners overlook the balance sheet and instead focus on their profit and loss statement 4 Key Documents Your Tax Preparer Needs From You because they use it to file tax returns. Without looking at their balance sheet (at the very least on a quarterly basis), they operate their business from an uninformed position.

How Often Should You Run Your Reports?

At the very minimum, you should be generating all three reports once a year. (After all, you’ll need your P&L and possibly some information from your balance sheet to do your tax return.) However, it’s advisable to look at all of your statements on a monthly basis after your books have been reconciled. This will allow you to quickly catch discrepancies and make sure that your income and expenses are being recorded properly.

Reviewing your balance sheet, profit and loss statement, and cash flow statement every month will also make it easier for you to spot erroneous recurring payments. And this is an area where you should pay attention because subscription-type expenses can add up over time (sometimes sneakily switching from a free trial into an auto renewal) and waste money if you don’t keep tabs on them.

A Final Word From Tuesday Brooks Founder of AJOY

Don’t overlook the importance of learning how to generate financial statements on a regular basis! These reports will give you visibility into the true financial status of your company which will help you make well-informed decisions. To make the whole process easier, keep your books looking pretty (check out this post about pretty financials) and consider getting help from an accountant who specializes in small businesses. You don’t have to do it all alone! Just recognize the important role these financial statements play in the welfare of your business, make plans to have them frequently generated, and be sure to look at them. Until next time!