For small business owners, reviewing financial statements is one of the key factors in whether the business succeeds. This is something that can be easy for small business owners to overlook. They pay attention to the day-to-day activities of their trade, dealing with customers, and creating their products.
Often, entrepreneurs and small business owners put off reviewing financial statements or wait to go over them with their accountants. But reviewing your financial statements on a regular, more frequent basis can help you spot trends and identify opportunities and issues early on.
Reading and understanding a financial statement is not as difficult as it appears. Learning the basics helps small businesses gather insights about their growth and how to improve. These insights allow business owners to make strategic decisions to scale their offerings for greater success.
According to the Small Business Association, the success rate of small business owners that only go over their financial reports yearly is only 25-35%. As high as 75% of those business owners will fail. At the same time, there’s a 95% success rate for business owners who go over their financial reports weekly.
Setting a Schedule to Review Financial Statements
Many business owners fall into the habit of only reviewing their financial statements once a year with their accountant. Some business owners do their accounting internally and only review statements when it’s time to report income, either quarterly or yearly.
This poses some serious risk because it’s impossible to accurately track business growth, profits, and losses without reviewing the information regularly. Paying attention to bank statements alone won’t provide a good overview of the business’s financial health.
Financial statements, though, can be intimidating. And that may be a big reason that any many small business owners put off reviewing them more often. But a few tips like the ones we shared in this post about how to read financial statements can make it much easier.
Information about each of the reports listed in the section below can help entrepreneurs choose the right reports, learn to compile them, and use them effectively. It’s also an excellent idea to work with a financial professional to determine the right reporting for the business and industry and ensure your financial statements are accurate.
At Avisar Chartered Professional Accountants, our experienced team works directly with business owners to explain the type of reporting that is most useful for their industry and business model. We understand that our entrepreneurs have a passion and brilliance for their own industry. We cut out the jargon to make understanding and using financial statements simple and effective.
Financial Statements Business Owners Need to Review
Keeping a handle on bank statements is an important consideration for personal finance, but business health needs a more robust approach. Here are some of the financial statements that most businesses should be reviewing on a regular schedule (weekly or monthly).
- Income Statement
- Balance Sheet
- Cash Flow Statement
We covered these statements in more detail in a post about judging a business’s health. Here, we’ll give a quick overview and tell you how often to review these statements in your business.
We advise that you look at your income statement once a month. For smaller businesses, looking at them quarterly may be sufficient, but you don’t want to push it longer than that.
An income statement is also called a Profit and Loss Statement. These are the same reports, and they might also be called a “P&L”. This statement shows the revenue a business generates from business or services, as well as the costs to generate that revenue. All the expenses and overhead of running a business are accounted for, as well as the income and actual profit.
Income statements are important because they clarify how much the company spends for each project or product, for a clear picture of the profit.
Balance sheets should be prepared and reviewed quarterly. Don’t wait a full year to review your balance sheet.
A balance sheet is an overview of the company’s current finances. It shows the assets, debts, and equity the company holds during that reporting period.
Cash Flow Statement
Cash flow statements should be reviewed frequently, on a weekly basis for most businesses.
The cash flow statement is a report that shows all the data on incoming cash, or income the company receives, as well as the outflowing cash, or expenditures. The cash flow statement is an aggregate report. It includes all revenue streams tied to the business and is especially important for businesses that have multiple revenue streams.
How Business Owners Can Get a Handle on Their Books
For small business owners, the terminology surrounding financial reporting can be intimidating. However, putting off reviewing financial statements can hinder the business. There are numerous sources to learn the basics, and it’s highly advisable for small business owners to work with an expert to set up their reporting and review schedule.
For more on reading and understanding check out our Guide to Reading Financial Statements for Business Owners.
Disclaimer: Avisar Chartered Professional Accountant’s blog deals with a number of complex issues in a concise manner; it is recommended that accounting, legal or other appropriate professional advice should be sought before acting upon any of the information contained therein. Although every reasonable effort has been made to ensure the accuracy of the information contained in this post, no individual or organization involved in either the preparation or distribution of this post accepts any contractual, tortious, or any other form of liability for its contents or for any consequences arising from its use.