Running a small business usually means doing many different things simultaneously. As a solo entrepreneur, you are probably dealing with everything from sales to marketing, but the majority of business owners consider financial tasks to be the most difficult.
After all, this is exactly why only 50% of companies survive their fifth year in business. Financial statements are one of the features that particularly bother small-sized companies.
By definition, financial statements are written records that convey the business activities and the financial performance of a company. In other words, it is a document that clearly reveals the overall condition of your company.
Financial statements consist of three basic elements – balance sheets, income statements, and cash flow statements. However, it takes more than that to design a meaningful record of business activities. In this post, we are going to show you six ways to make sense of your small business financial statements.
Create an Accurate Income Statement
We already mentioned the three elements of a financial statement, so let’s open the list with the first component. We are talking about income statements, also known as the profit and loss statement.
This is a major feature because it reveals the profit gained and all of your expenses in a given timeframe. For instance, you could be creating a quarterly or annual income statement.
The income statement helps you and your clients to understand the nominal value of your small-sized business simply by comparing the revenue with the sum of expenses that took place in the same period.
Mind the Balance Sheet
Although very important, income statements cannot compare to balance sheets. The second item on our list is the real indicator of professional success, so you have to pay special attention to it. Bearing this in mind, it’s not a surprise to see clients and investors asking for this document in particular.
Unlike income statements, balance sheets reveal the current situation of your finances. The document applies to the specific date, thus showing the company’s situation in terms of liquidity and stability. A balance sheet should pinpoint three features:
- Business assets: This includes everything your organization owns.
- Liabilities: It reveals everything your organization owes.
- Owner’s equity: This one allows you to see what’s left for the owner once you’ve nullified all of the liabilities.
Don’t Forget a Cash Flow Statement
The third component of a financial statement comes in the form of a cash flow statement. This is another very important feature because 60% of failed small and medium enterprises cite cash flow issues as the main reason.
For instance, your sales results might be flourishing, but you could still be struggling with delayed payments and the way cash flows into your business. In this case, you could be spending more money than you can afford due to the underperforming cash flow cycle.
You can analyze cash flow whenever you want and craft anything from annual do daily cash flow statements.
Make a Revenue Forecast
So far you’ve seen the essentials of creating a financial statement, but we must add three more elements to the equation. The first one is called a revenue forecast and it represents a critical report if you want to take a glimpse into the future of your small business.
To put it simply, the revenue forecast is the evaluation of the profit and loss in the next year or any other period in the future. If you make a realistic estimation, you can make additional plans related to marketing investments, sales strategies, operational costs such as salaries, and so on.
If you don’t want to enter the following year blindfolded, then making the revenue forecast is the only way to go.
Conduct an ROI Analysis
Too many small businesses are not able to calculate return on investments (ROI), especially in the field of sales and marketing. According to the report, only 50% of marketers believe their organization can correctly calculate ROI.
If you want to keep the business profitable in the long run, you have to be clever enough to measure performance on a regular basis.
The idea is simple – you just need to divide the outcome/benefit of your investment with the actual cost of the same investment. If you get in return more than you paid for in the first place, then you can consider the investment to be worthwhile.
Hire a Professional to Make Financial Statements
The last tip on our list is clear and direct – if you find the abovementioned tasks too difficult, then you should hire a professional to do it on your behalf. A lot of entrepreneurs hate to admit it, but the truth is they cannot handle financial reporting single-handedly.
If you are one of these small business owners, we strongly recommend you to stop experimenting and start taking things seriously. Hiring a professional accountant might cost you at first, but you won’t have to worry about possible mistakes that could have a devastating effect later on in your business.
Small-sized businesses are often struggling to get things done timely and efficiently. With too many duties and not too many workers, you can hardly find enough time to take care of financial statements and do it without making substantial errors in the process.
In this post, we discussed six ways to make sense of your small business financial statements. Can you do this job single-handedly? Do you have other useful tips to share with your peers? Feel free to write a comment – we would love to see your experiences with financial statements!
Guest Post: About the Author
Becky Holton is a journalist and a blogger at essay writing service australia. She is interested in education technologies, assignment help and is always ready to support informative speaking at resume writing service. Follow her on Twitter.