Does the thought of presenting your business’ financial statements give you anxiety? Have you ever left a meeting with your accountant unsure of what the financial terms mean? If so, you’re not alone. According to a QuickBooks survey, nearly 40% of small business owners identify as “financially illiterate”. While the term ‘financially illiterate’ feels extreme for many, most small business owners will admit that they have room to grow when it comes to reading and, most importantly, acting on what they learn from their financial statements.
What are the Primary Financial Statements?
There are several statements small businesses need to understand to operate most effectively.
Balance Sheet:
This report demonstrates the health of a company over time. It provides an overview of assets, liabilities, and stockholder equity/capital.
- Assets: Items owned or controlled by the company that are of financial value (e.g., bank accounts, vehicles, equipment, inventory, etc.)
- Liabilities: Items the company owes to others (e.g., loan balances, credit card balances, unpaid taxes, unpaid 401k contributions, etc.)
- Equity/Capital: The value that the owner of a business has left over after the liabilities are deducted from the assets. Multiple accounts contribute to equity: shareholder contributions, shareholder distributions (owner’s pay & personal expenses/member draws), retained earnings
Income Statement (Profit and Loss Statement):
This report summarizes the revenue, costs, and expenses incurred during a specified period.
- Income: The payments you receive from the normal business activity. (May also be called sales or revenue)
- Cost of Goods Sold: The direct costs associated with the production of a good sold by the company. This could include materials, labor, and shipping (delivery of the product to the customer). It would not include indirect costs covered in expenses.
- Expenses: The money you spend for normal business operations (e.g. rent, utilities, office supplies, advertising, etc.)
Where Do These Statements Come From?
Most small businesses utilize some form of QuickBooks accounting software to make bookkeeping more streamlined and store the financial data that make up financial statements. While QuickBooks can be a useful tool for interpreting financial statements, it helps to walk through your account with an Intuit QuickBooks Certified ProAdvisor to make sure your account is optimized for your unique business needs. There is more than one way to track invoices and pay expenses in QuickBooks, but the best way for your specific business may vary. These variations can make a big difference in the accuracy of your financial statements and ultimately, your bottom line.
Dangers of Misreading Financial Statements
Without a solid understanding of financial statements, it’s nearly impossible to make accurate profit projections for the next year. Additional risks include not having the cash flow to meet short-term or long-term obligations, hiring more employees than the business can support, and being crippled by debt if certain ratios are off. The consequences of misunderstanding the financial statements can certainly be detrimental, but reading financial statements doesn’t have to be intimidating. And you don’t have to do it alone. The Storen team has highly trained bookkeepers and tax professionals on staff to review business financials and help you develop a profit plan that serves your business well.
Benefits of Understanding Financial Statements
The added confidence that comes with understanding your statements can be incredibly empowering for business owners. The Storen tax and financial consulting team can teach you how we apply key financial statement takeaways to minimize your tax liabilities, streamline your operations, and even show you new ways to harness technology to increase your profitability. We do this by offering special Q&A sessions to make sure the statements are clear, providing templates for operations, and offering on-site visits upon request.
Our team of seasoned Intuit QuickBooks Certified ProAdvisors and licensed financial consultants are dedicated to helping business owners break down confusing financial statements and formulate successful profit plans. Reach out today to sit down with a trusted advisor.
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Blog by Erika Lewis – Business Technology Consultant and QuickBooks Advanced Certified ProAdvisor
Learn more about Erika and the rest of the Storen Financial team here.