Financial statements are the backbone of any business.  They provide a picture of its financial health.  They are critical for business owners along with any potential buyers.  Although a business owner may think that they know how their business is doing because they are intimately involved in the operations, they can sometimes be unaware of the true condition of their business’ health.  Some business owners pay attention to sales or revenue and if that is heathy, they perceive that the business is healthy.  Some pay attention to cash flow.  If sufficient cash is coming in the business must be doing well.  While that may be the case, a business owner may be missing problems or opportunities for improvement by not paying attention to financial statements. 

What are financial statements?  They are an information system that reports a company’s revenue, expenses, assets, liabilities, and equity.  They document the entire ecosystem of financial performance and health of a business.  This is why they are so important to an owner and to a potential buyer.

Let’s break them down:

1. Income statement also called a Profit and Loss Statement
   1. The P&L shows the revenue and expenses of a business usually in monthly periods which may be rolled up into annual statements.
   1. Net Operating Income is Revenue or Sales minus Cost of Goods Sold and minus Operating Expenses.
   1. Net Operating Income is only one measure, but it is a strong measure of the health of a business.
2. Balance Sheet
   1. The Balance Sheet is a snapshot in time of Current and Long-Term Assets, Current and Long-Term Liabilities, and Owner’s Equity of a company.
   1. Assets and Liabilities are usually divided into current and long-term based on their liquidity.
   1. There are several important ratios that measure the health of a business taken from the account balances on a Balance Sheet
3. Cash Flow Statement
   1. A Cash Flow Statement is a statement which shows how funds move in and out of a business usually in a monthly or quarterly period.
   1. Most small businesses don’t have a Cash Flow Statement, but it is helpful for both a business owner, or a buyer.

Why are Financial Statements important?

                Financial Statements are a decision-making tool to track progress of the success or shortcomings of business operations.  There are several key ratios that can show the health or lack of health in a business and alert an owner to be able to improve the health of the business.  Understanding the information provided by financial statements is very important to a business owner.  This information is also critical for a potential buyer should the owner choose to exit a business.  If you have questions reach out to us at www.thebusinessexitguy.com