Demystifying Financial Statements: An In-Depth Guide for Small Business Owners

As an entrepreneur, keeping tabs on your business‘s financial health is imperative for success. But I remember feeling completely clueless when it came to recording income, expenses, assets – let alone compiling them into financial statements.

"What is a balance sheet anyway?" I wondered. "And what on earth is an income statement telling me?"

I knew winging my finances would only get me so far. Like 80% of small business owners according to Fundera, I needed to get serious about my financial management.

If you can relate, this guide is here to help decode key financial statements in simple terms, so you can better understand (and improve!) the financial position of your growing company. Consider me your friend and advisor here to shed light on best practices I wish I knew when starting out!

Demystifying Your Balance Sheet

The point of a balance sheet is to show what your business owns and owes at a distinct point in time. It provides you a 30,000 foot view of how your hard work has built equity thus far.

Here are the key elements:

Assets:
This covers anything of value that your business owns. For example:

  • Cash & Accounts Receivable – This includes…

Liabilities:
These are the debts and obligations owed by your company. Common examples:

  • Accounts Payable – This covers…
  • Credit Card Balances – This refers to…

Owner’s Equity
Sometimes called shareholder‘s or proprietor‘s equity if you have partners, the formula is:
Assets – Liabilities = Owner’s Equity

Here’s what that could look like visually:

| Assets | |
|^ Total Checking | $10,000
|^ Accounts Receivable | $5,000
|^ Inventory | $8,000 |
Total | $23,000

| Liabilities ||
|^ Accounts Payable | $6,000 |
|^ Credit Card Debt | $3,000
| Total | $9,000

| Owner's Equity | = Assets – Liabilities
|||
|| $23,000 – $9,000 = $14,000

Tracking assets and liabilities takes dedication, but doing so provides immense clarity on the financial standing of your business. Here are a few tips that helped me…

What Income Statements Reveal Over Time

Here’s another statement crucial for small business owners – the income statement. It outlines two things:

  1. How much your business earns via products/services
  2. How much it costs to deliver them

In doing so, your income statement uncoversa key metric – profit or loss over a period of time.

Here is what an income statement shows regarding:

Revenue:
Total income generated and earned from sales, services etc provided.

Expenses:
The full costs of operations during the same time frame.

Consider:

  • Materials
  • Payroll
  • Rent
  • Utilities
  • Insurance
  • Software subscriptions

Total Profit or Loss:
With both revenue and expenses documented, simply subtract your expenses from earnings to understand profits or losses for that time period.

Tip #1: Make record-keeping a habit…

Tip #2: Leverage accounting tools…

Evaluating Cash Flow

While profitability is important, you also need enough cash readily available to handle operating expenses, invest in new opportunities, take on financing if need be and ultimately – grow.

That‘s why small business experts recommend preparing a Statement of Cash Flows every month.

It tracks the actual cash flowing "in and out" of your company across three areas:

  1. Operating Activities:
    This covers core cash earned from regular business operations and cash spent on essential operating costs. Tracking this helps you analyze profitability.
  2. Investing Activities:
    Cash utilized to obtain assets like vehicles, equipment, or new technology to meet growth goals. Having clarity here prevents over or under investment.
  3. Financing Activities:
    Cash received or paid relating to external financing via investors, loans, lines of credit etc. Seeing impacts to your cash levels from these sources helps with forward planning.

Understanding past cash trends offers immense insight into improving management of your various cash activities going forward.

Pro Tip: My #1 recommended tool for automated cash flow tracking is FloQast, which…

Get Expert Support If Needed

I admit, self-preparing detailed financial statements while handling day-to-day operations is challenging at first. But I’ve noticed…

If you want additional help, consider hiring a bookkeeper proficient in Quickbooks Online to handle recording transactions. Costs might start around $30/hour for 5-10 hours a month of work depending on complexity.

Or, engage an accounting professional to compile financial statements for you quarterly while also providing financial advice. Expect fees of $200 or more per month for this level of support.

The investment is absolutely worth accurate data, expert input and peace of mind on the profitability and sustainability of your entrepreneurial endeavor!

Let me know if any part of tracking your company financials remains unclear! I remember how confusing this once felt for me too. But taking it step-by-step, you’ve got this!