Financial statements are a key tool for running your business. A financial statement is a formal set of record of a company’s financial status at a specific point in time. These plans give a current landscape of your small business and forecast the future vision and plans of the business. They include key data on what your company owns and owes and how much money it has made and spent. Financial statements are also used by bankers, investors and others to assess the health and liquidity of your business and make decisions that affect it.

Creating financial statements for your small business starts with your day to day bookkeeping. You will use, pull and organize the data from these records to put together your financial statements.

Understanding financial statements

There are three basic financial statements — written records that show your business activities and financial performance. We’ll look at what each of these three basic financial statements do and examine how they work together to give you a full picture of your company’s financial health.

• Income Statement
• Balance Sheet
• Cash Flow Statement

These reports are crucial for running the day-to-day operations of your business. Here, we’ll give a quick overview and tell you how often to review these statements in your business.

Income Statement

An income statement is a record of revenues and gains and expenses and losses for a set period of time.  In simple words, it shows you how much you made (revenue) and how much you spent (expenses). An income statement is also called a Profit and Loss (P&L) Statement. This report shows your bottom line, so it’s the document you would show potential lenders like a bank or investors. It’s also important in tax season, as your taxes are calculated based on your net income.

Your income statement is based on this formula:

Net Income = (Revenues + Gains) – (Expenses + Losses)

Balance Sheet

A balance sheet is an overview of the company’s current finances. It shows the assets, debts, and equity the company holds during that reporting period. It’s important because it indicates the approximate cash value of a business. Partners might use it to valuate stock, and lenders look at it to assess collateral and risk, which affects your likelihood of receiving funding for your small business should you need it.

Your balance sheet is based on this formula:

Assets = Liabilities + Equity

Cash Flow Statement

A cash flow statement shows how money comes in and how it goes out in your business at any given time to understand the effect daily operations have on the business’s overall financial position. While your income statement can tell you whether you made a profit, it doesn’t take into account delinquent or missing payments or help you determine whether you actually generated enough cash to stay afloat.

The cash flow statement is an aggregate report. It includes all revenue streams tied to the business and is especially important for businesses that have multiple revenue streams.

Your cash flow statement is based on this formula:

Operational Costs + Asset Investments + Financing = Cash Balance

How DM Tax can help?

For small business owners, the terminology surrounding financial reporting can be intimidating. However, putting off reviewing financial statements can hinder the business. An experienced bookkeeper can prepare your financial statements for you, so you can make smart financial decisions without all the difficult paperwork.

Here at DM Tax, we specialize in bookkeeping for start-ups. Let us handle all of this for you, so you can spend your time focusing on other areas of your business.