Understanding Financial Statements: A Guide for Small Business Owners

Close up Business people meeting to discuss the situation on the market. Business Financial Concept

As a small business owner, it’s important to have a good understanding of your business’s financial situation. Financial statements are a valuable tool to help you track your progress, make informed decisions, and plan for the future. Here are some major financial statements you’ll come across, what they tell you about your business, and why it’s a good idea to take your time reviewing these with a professional so you’re better equipped to steer your business toward success.

1. Income Statement 

This financial statement shows your business’s revenue, expenses, and net profit or loss over a specific period of time. The income statement helps you understand how profitable your business is and how effectively you are managing your expenses. You can use it to compare your performance from one period to another and identify areas where you can cut costs. It also helps you set targets and goals for your business and how your accountant can help.

2. Balance Sheet

This financial statement provides a snapshot of your business’s financial condition at a specific point in time. It shows your business’s assets, liabilities, and equity. The balance sheet helps you understand your liquidity, which is your ability to pay off your debts when they become due. It also lets you track your business’s growth by showing how your assets and equity have changed.

3. Cash Flow Statement

This financial statement tracks the inflow and outflow of cash in your business over an exact period. It helps you understand your business’s cash position and identify potential cash shortages in the future. You can use it to manage your cash flow by prioritizing payments and collections and forecasting future currency needs.

4. Interpreting Financial Statements

To effectively use financial statements to your advantage, you need to understand what they are telling you. Look for trends in your income statement, such as increases in revenue or decreases in expenses. Analyze your balance sheet to identify your current assets and liabilities and determine your business’s financial health. Use your cash flow statement to manage your cash flow by making informed decisions about spending and borrowing.

Contact Us For All Your Business’s Accounting Needs

Don’t let the complexities of your accounting burden you any longer. Our small business and individual tax accountants can advise business clients with their day-to-day operations and assist individuals and companies in making decisions that would decrease their tax liability now and in the future. Get in touch with us here at Fuentes & Angel CPAs, LLC.