This week we celebrate the new year upon us! Of course, for many business owners it’s a significant time: the end of one fiscal year and beginning of another, closing the books and establishing the next set.
I hope you have observed strong growth and profitability!
When the time is right…I mean, first, be kind to yourself: take some time and enjoy this extended holiday season with your family, ease through this transition…. but when the time is right, analyze the financial health of your business. At a minimum I recommend looking at 3 reports and understanding them to gain Clarity on what has occurred, make Connections to influence the future to put more Control in your hands to maximize that financial health.
The 3 reports I’m referring to are the Income Statement (P&L), Balance Sheet and Statement of Cash Flows.
Just looking at the Income Statement to determine how profitable you were does not tell the whole story. And you owe it yourself to have a firm grasp on how your business–something you’ve poured your blood, sweat and tears into–is doing. Paying attention to only the Income Statement is kinda like visiting the doctor for a full health check up and only receiving your blood pressure results. Just like there is more to your own personal health than your blood pressure, there is much more to the financial health of your business than profitability.
Does the Income Statement show you were profitable? Great! Is there cash to show for it right now? If not, the Balance Sheet and Statement of Cash Flows specifically tell the story of exactly where the cash went. You see, it’s kinda weird, but many business expenses, or to be precise, transactions that cause cash to leave the business, don’t always count as expenses like we would think. They do not lower your taxable income.
Okay, so we have an Income Statment that says you were profitable, yet far less cash in the bank than the bottom line says. Thats obviously a big problem that leaves many in a lurch. How do we reconcile this?
Well, those events when cash leaves the account for things that don’t affect the Income Statement… they can be found affecting accounts on the Balance Sheet. In short, the Balance Sheet is basically a snapshot at a point in time of how robust your business is in numerous categories (and in many cases shows how much it owes elsewhere). It shows things like Owner’s Distributions and Contributions (Equity), the principle portion of a loan or vendor account balances owed (Liabilities), and inventory or equipment purchases (Assets). Regularly inspecting the Balance Sheet is very useful to keeping you up on the robustnesses (yea I said it) of many areas of your business. That said, I admit combing the Balance Sheet for changes to each and every account, month to month to month to identify changes etc. is daunting, not to mention super tedious.
Thankfully, we have the Statement of Cash Flows available to us! This report is amazing! At the top is the Net Income, which of course is the bottom line of the Income Statement, so already there is so much data and info built in and accounted for. Then, it lists out all of those accounts not found on the Income Statement that do affect your cash balances, like the ones I mentioned earlier. All of them! In one place! In a nice, clean, easy to read list that is a summary of exactly what the report is called: Statement of Cash Flows, or how about the Statement of “Where did my cash goes?” Maybe just “go”… 😉. And naturally, it finishes off by stating how much cash you had at the beginning of a period, what the net effect was on the cash and how much is left over at the end of a period.
So, to round this out:
- You can see you were profitable but don’t have cash piled up for things like taxes.
- Interpreting these 3 reports, you can now see and understand what happened.
- From there a plan can be made to improve all or at least more areas of your business’ financial health to be in a better position in the future.
They say knowledge is power. I hope you found this helpful and that it will help empower you to gain more Control over your finances going into this year. It’s gonna be a great one!
Thank you so much for stopping by and reading. I would love to help you increase Clarity, make useful Connections and help you gain more Control in your business, via the tool of bookkeeping.
Please reach out if there is anything I can help you with or if you have questions.
PS: having these reports work for you and be nice to look at does require some organization of the Chart of Accounts and details therein. Just be advised that if you go to pull all these reports right away to do some analysis, they may not be easy to make sense of.
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