Why it’s important to know how to read your financials
You can think of your financial statements like your report card for your business. They show you the performance and value of your company. Financial statements are what your investors use to measure your company. Below are the primary financial statements and how they are used.
- Income Statement
This is often called the Profit & Loss Statement; it shows the revenue (income) and expenses covering a certain period of time. This statement is meant to show you if your company is making a profit or losing money.
- Balance Sheet
You can think of the Balance Sheet as a snapshot of your assets (what you own) and liabilities (debt) at a certain point in time.
It’s crucial for a business owner to understand these two statements. A lot of small business owners tend to look at what’s in the bank account instead of what their financials show. This method can often lead to your business going under because you aren’t making a profit. It’s important to have accurate and timely financial statements to understand and run your business. This is important if you need to get a loan for your business from the bank or if you end up wanting to sell the business.
Most small business owners have a bookkeeper or accountant who run their numbers and make sure they have accurate financials. If you currently don’t employ a bookkeeper or accountant I highly suggest you look for one in your area that you trust.