Why look at financial statements?

It seems to be more and more common to meet business owners who never look at their financial statements, don’t know how to read them, and don’t realize the importance of them.  Many entreprenuers start their business because they have a great idea or want to turn a hobby into a career.

It seems to be more and more common to meet business owners who never look at their financial statements, don’t know how to read them, and don’t realize their importance. Many entrepreneurs start their businesses because they have a great idea or turn a hobby into a career.  They didn’t go to business school or receive any help when setting up their business.  So while they may be fantastic at making their product or helping customers and clients, they don’t know all of the behind-the-scenes parts of running a business.

One of the most important parts of running a successful business is understanding your finances.  Here are just a few reasons why it is so important. 

See How Much Money You're Making

You need to be looking at your Income Statement monthly to see how your business is doing.  While this doesn’t show you the whole financial picture, it will tell you how much money your business is making.  If you’re only looking at your bank statements, you can’t tell how much of the money in your account may have come from yourself as a contribution, not income.  You may not see how much money was paid to credit card and loan payments, not business expenses.

Cash Flow

Another reason why looking at your financial statements is essential is to check on cash flow.  While the Income Statement will tell you how much money your business is making, it doesn’t tell you the whole picture.  Your business may make a Net Income of $10,000 each month but pay out $15,000 in loan payments, owner draws, and estimated tax payments.  So even though your business looks like it’s making money, you have negative cash flow.  Looking at all of your reports will help you see how your business is doing and if you are able to cover all of your financial obligations.

Plan for the Future

Planning for the future is especially important if you have a seasonal business. You need to look at how much money you need to save to help pay for expenses during slow months. You can estimate tax payments, so you don’t have a huge tax liability at the end of the year. This will also help you determine what to pay yourself as an owner.  And this can help you plan for future expenses such as new equipment purchases, hiring new employees, or possible expansions.

Become More Profitable

The majority of small businesses I work with are Sole Props, Partnerships, or LLCs.  For all of them, the amount of money the business makes is directly correlated to the amount of money they take home.  So the more profitable their business is, the more money they make.  Many reports can help you increase profitability, but if you don’t look at them regularly, they cannot help you.  You can see trends, plan for slow or busy times, keep inventory levels in check, and much more.

Help Your Business

Understanding your financial statements and analyzing them on a regular basis is the only way to help your business grow.  You may be able to get by in the short term, but long-term growth and sustainability will only happen with the help of your financials.  Not sure where to start?  Check out my class Intro to Financial Statements or email me for help!