The Importance of Understanding Financial Statements

The Importance Of Financial Statements - McCormick-Smith Services LLC

Many businesses hire or contract a bookkeeper, accountant, certified public accountant (CPA) and/or tax professional to “handle their financial affairs”.  This is wise and very beneficial in most cases and allows an experienced individual to provide you with your monthly financial reporting needs.  But do you as a business owner understand the financial statements provided by these financial professionals?

In November 2014, a survey conducted by Intuit revealed 40% of business owners considered themselves financially literate but there are more than 81% handling their own business financial affairs.  This survey also states that 66% of business owners wish they knew more about their finances.  In addition more than one-fourth of small businesses (28%) are in debt.  It is time that the small business owner becomes aware of the importance of financial statements.

Financial statements provide business owners a picture of the past, current and future of their company.  The three financial statements business owners should make time to review (usually monthly) are the income or profit-and-loss statement, balance sheet and statement of cash flows.  Below is a brief explanation of each of these financial statements:

  • Income or Profit-and-Loss Statement – Shows the sales and expenses of a business and provides if the business has a profit or loss for a specified period of time.
  • Balance Sheet – Shows what a company owns (assets), owes (liabilities) and owes the business owner (owner’s equity)
  • Statement of Cash Flows – Shows the cash transactions of a business and how it flows from operating, investing and financing activities

By reviewing and understanding financial statements, you are able to identify trends in your business including uncollected funds, past due bills, unbalanced bank accounts and changes in inventory just to name a few.  If you need further assistance with understanding financial statement, contact your financial professional.  Remember, understanding all parts of your business is your key to success.

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