If you’re at the helm of a small business then the chances are there will be plenty else to occupy your time and your attention besides your financial statements. Indeed, most of us would consider the creation of these statements as being a chore that once completed should be set aside until the next time the obligation becomes unavoidable.
However, there are a number of important ways in which you might be able to make more of your financial statements as a small business if you’re prepared to work towards gaining a stronger sense of what they reveal and why they are so potentially useful. This article will aim to illuminate precisely why and how that is the case.
Profits and losses
We’ll start with one of the core equations that in many ways lie at the heart of any company’s finances, namely the profit and loss aspect of your financial statements.
The reason why these elements are important is clear enough in one sense in that it details where your business’ money is coming in and where it is being allocated in terms of outgoings. But we can go further here and wonder how this information might be made more useful and informative. Primarily this will be about asking whether certain income streams might be built upon and maximised and where specific sources of loss can be minimised or avoided altogether.
It is also possible and a good idea at this point to scrutinise sources of outgoings and to ask whether they can really be justified or whether there is a real problem that needs to be addressed with some urgency.
For potential investors, the profit and loss equation is particularly pertinent because it tells an important story about how sustainable and resilient your business really is. Plus, your profit and loss details are also crucial in that they reveal the true extent to which your business might be able to invest in the interests of your operational future at a particular moment in time.
The balance sheet
Profit and loss assessments tend to be made at various pre-determined junctures, whether that’s monthly, quarterly or on an annual basis. Balance sheets, by contrast, are designed to deliver a more immediate and ad hoc snapshot of how your business is performing from a financial perspective.
As such, a balance sheet goes a long way towards describing and outlining the essential elements of your business’ finances and sheds light on the amount of liquidity and working capital that is available to it at particular moments.
From a financial management perspective, a balance sheet can be useful in that it clearly shows what your business has outstanding in terms of its debts and liabilities, alongside the more positive notes relating to assets and equity available for owners or directors.
A balance sheet, when properly put together, can be used as a kind of business health check and as a means of illustrating where the balance between assets and liabilities currently lies within your organisation. It should also give a clear indication of how easy or otherwise it would be to tip that balance one way or the other and to turn assets into readily available cash if an occasion called for it.
Cash flow statements
Cash flows are fundamental indicators of how healthy or vulnerable a small business really is. The simple truth is that no company can operate without sufficient working capital to cover its outgoings, regardless of how considerable in scale its income or earnings might actually be.
Indeed, it’s a sometimes cruel reality of business operations that even otherwise perfectly sound and viable operations can be squeezed to breaking point by cash flow concerns beyond their control.
Therefore, from a small business perspective, there is little, if anything, that should be prioritised above cash flow considerations and any effort to foresee and overcome cash flow concerns can be crucially important in a variety of ways.
Speaking generally, the trouble with cash flow problems is that they have a horrible habit of escalating quickly and running out of control if not addressed with urgency and foresight.
Therefore, keeping a close eye on the cash flow lines of your small business financial statements can very easily be the difference between surviving tough times comfortably and being forced into emergency action. And, of course, in some instances it can in fact be the difference between remaining viable and going out of business altogether.
Understanding your options
By using your financial statements to your advantage as a small business in the ways outlined above it becomes possible to establish a more resilient and flexible operating position. One of the key reasons for this is that having a solid and up-to-date appreciation of your financial position means you’re more likely to be able to act quickly when money-related difficulties arise.
Specifically speaking, a business boss who knows the finer details of his or her financial statements will be better placed to understanding and access funding options on short notice. Whether this means accessing finance through leveraging assets or seeking out sources of credit that might be appropriate at a given moment, the key is the flexibility that a full understanding of the options available can afford.
There’s no escaping the potential for financial statements to be dry and somewhat uninspiring of the most part but nor is it possible to avoid the realities of small business finances if your operation runs into trouble. In this context, as in so many others that relate to competitive market scenarios, ‘forewarned is forearmed’ and preparing for any eventuality can be a major advantage in the immediate as well as the longer term.
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