October 23, 2020
Why they’re important
It’s always been my goal to demystify accounting. It may be a boring topic at the outset, but boredom only holds true if the numbers don’t tell a story.
BUT numbers TELL stories. They always do, in fact! And if you think about it, the story can be as riveting as solving a murder mystery (like, where did my funds go? Client A just put in a check yesterday?!) or exhilarating as winning the lottery (Hey, how did I earn all that this month?)
Apart from compliance with the law, getting your financial statements (FS) in order is not just proper.
It is essential to your survival.
The three components of an FS lets you know how your business is doing.
The INCOME STATEMENT tells you how profitable your business is.
The BALANCE SHEET shows you how much the business is worth.
THE CASH FLOW STATEMENTS describe how your cash is earned and used.
What’s the purpose of an FS?
If you are looking to expand your business, you will most likely talk to an investor, a partner, or a lender. They will need the latest financial reports as these will assess how healthy you are in terms of finances.
As your company grows, you also want your employees to know how the business is coping. Letting them in on the basis of strategic decisions is a great way to increase motivation and productivity.
Last but not least, accurate financial statements are needed for tax returns.
What do financial statements tell me?
The yardstick with which investors measure your business is the financials. You can keep saying that your business is doing well, but what you say won’t hold water until you show your financial statements. Your FS reveals financial health as well as operational efficiency. Are you able to collect your receivables on time? Are you earning? Which months of the year are the least lucrative? How much debt do you have compared to the assets you own? Can this business pay a loan without going bankrupt?
Accuracy and consistency when it comes to preparing these statements are indispensable when presenting truthful metrics. These metrics show profitability plus other ratios that can be used to compare your business with the industry. It’s crucial for tracking progress versus plans, budgets, and projections. It shows you how your business is doing. Lastly, it raises your executives’ and investors’ comfort level because they know that you have the numbers down pat.
Overall, it pays to prioritize having financial statements. When you begin your business, it may be acceptable to have the owner or an executive reconcile bank accounts and track expenses. But as your company grows, you need to have a plan, a budget, and a devoted accounting group to handle these tasks. Not only does this demonstrate compliance with the law. It also gives you more elbow room to concentrate on your core activities.