A common question I’m often asked is, “Why do I need financial statements?” The answer impacts all types of businesses – in an office tower or in a basement.
Financial statements consist of a Balance Sheet and Profit and Loss (or Income) Statement. (And then there’s the dreaded Cash Flow Statement, the thing that really confuses people.)
A Balance Sheet shows you:
- How much cash you have in the bank
- How much money may be owed to you
- How much money may be tied up in Inventory
- Assets of your business
- How much money you may owe vendors
- Liabilities for things like loans or lines of credit
- How much equity you have in your business
A Profit and Loss Statement (my personal favourite) indicates the following:
- A breakdown of revenue streams and how much you are making in each
- The direct cost of goods to sell your products or services
- Costs of the operations of your business: payroll, administrative expenses, general costs
To understand how your business is performing on a month-to-month basis, or even quarterly, you need a set of financial statements. To make decisions, you need financial statements. If you are watching your financials, unpleasant things won’t be surprises.
If you simply want to pass over your shoebox full of receipts each year to have your returns filed, you don’t need financials. But, if you want to understand how to grow your business, financial statements are highly recommended.