Financial statements are structured reports that summarize a company’s financial performance and position over a specific period represented by the balance sheet, income statement, and cash flow statement.
Primary Implication
Every business starts with cash, which is invested in numerous ways to generate revenue. Ultimately, the revenue is turned back into cash, and the cycle begins anew.
Each financial transaction creates financial data when recorded, can be used to report on the results of the business. If the data is accurately recorded, you know with confidence the financial position of the company for any given period. Use this information to manage your business to higher profits.
Overview
Data from your sales production efforts are used to create financial summary reports on the results of operations for any period you have recorded the transaction data in your accounting software. Each available financial statement represents different roll-ups of your business transactions. The reason why most business owners struggle with holding onto cash is because they are inconsistent in recording their business transactions into their accounting software.
Use your financial statements to forecast your cash position or stop your profit losses by understanding how the funds entrusted to management by the owners (stockholders) and lenders led to the current financial position, through the following three primary financial statements:
- P&L (also called income) statement shows how the net income of your business is determined over a stated period by subtracting expenses from revenues.
- Balance Sheet shows your assets, liabilities, and net worth on a stated date.
- Statement of Cash Flows shows the sources of cash utilized by your business activities during a stated period.
Those who fail to act on the results of their business financial reports choose to operate their business blindly via the “hope” method, “hoping” their daily activities of operation are producing profits, not losses. The problem is that “hope” is not a method you can count on to deliver planned higher profits and predictable cash flow.
