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Making Sense of your Monthly Financial Statements

All businesses need financial statements, and small businesses are no exception. While software claims to compile financial statements for you, the old saying remains true: garbage in, garbage out. If the initial data entry is wrong, the end product is as well. Beyond data entry, a small business owner also needs to understand what accurate financials are telling them.

 

What Monthly Financial Statements Does a Small Business Need?

Balance Sheet

Displaying assets, liabilities, and equity, the balance sheet tells you where your business stands at a given point in time.

Profit & Loss Statement

This statement displays your revenue and expenses throughout a given period of time.

Cash Flow Statement

The cash flow statement answers the most common small business question: “If my business made so much money, where did all of the cash go?” This statement categorizes cash inflows and outflows amongst three activities: operating, investing, and financing.

 

How do the Three Financial Statements Fit Together?

You have the financial statements in front of you, but now what? Time to read them!

The three financial statements work together to tell the complete story of your business. Start with the balance sheet. What kind of shape is your business in? Do you have more assets than liabilities? How much equity do you have in the business? Have you met your bank covenants for the period?

Next, move on to the profit and loss statement, focusing on performance. Review how much you sold and how much you spent, arriving at your net income. This is the number you’ll want to keep track of for tax planning purposes. It should match your net income in the equity section of the balance sheet. If you keep a budget, how did your actual spending compare to budgeted? How did your revenue, expenses, and net income compare to this period last year?

Lastly, review the cash flow statement to complete the puzzle. Let’s say your profit and loss statement shows net income of $100,000, but you only have $55,000 in the bank. Where did that extra $45,000 go? Reviewing your cash flow statement, you see $45,000 in investing activities. Remember when you bought that $45,000 truck? That is a fixed asset added to your balance sheet, which will allow you to take depreciation expense on your profit and loss statement and reduce your taxes. Grab your balance sheets from the months before and after you bought it and you’ll discover fixed assets increased by $45,000. Now talk to your professional accountant about claiming special depreciation expense on your tax return!

 

How Does an Accountant Help With These?

A professional accountant helps create these financial statements for you, whether that means completing all of the data entry or reviewing and reconciling yours to ensure accurate financial statements. They also help you read them, and alert you when red flags appear, such as net losses, current liabilities in excess of current assets, and many more.

 

Working with Haworth & Company, Ltd.

At Haworth & Company, we specialize in helping small businesses succeed with our small business accounting program. We have proven systems so you can delegate the work to us, receive accurate financial statements, and then discuss what you need to do! Whether you’re local to the Twin Cities and Rochester or further out, give us a call and see how we can help you understand your business better.

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