Financial management is one of the top three internal deficiencies that can lead a business to bankruptcy, according to Statistics Canada. Learning how to understand financial statements and ratios and they will provide insight into the health of your business and aid you in your strategic decisions. In this article we will discuss the basics of three common financial statements; the balance sheet, the income statement, and the cash flow statement.
A balance sheet provides a snapshot of your current financial health at a given time and includes your assets, liabilities and equity. The balance sheet can represent how well you are able to meet your obligations. Some common ratios examined are the debt-to-equity ratio and the working capital ratio. Understanding these concepts is important to a business owner as they can help aid decision making. For example, knowing how well you are able to meet your obligations is important when deciding on business expansion.
The income statement is often referred to as a profit and loss statement and it shows all revenue and expense accounts over a given amount of time. Not only does the income statement show how profitable or not profitable your month/year was, it can be a useful tool for tracking line items against budgets and against each other.
The cash flow statement provides a picture of how much cash is on hand during a giving time period by showing the cash inflows and outflows during that period and where the cash came from and where it went. Since small business often have limited resources, it is important to review this statement often as it acts as a warning to potential cash crunches caused by uneven timing of cash receipts. A rolling cash flow projection is a useful tool to plan expenditures.
Familiarizing yourself with your financial statements and ratios will not only give you a better picture of how your company is doing, but you will also be in a better position to discuss your company with your advisors and bankers. So if you have not looked at your statements lately, we suggest you do it today!
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