Last October I shared some tips about cleaning up your Profit & Loss Statement in order to keep it simple and make it more useful: Does your Profit & Loss Statement Make You Go Cross-Eyed?
As Q1 2019 draws to a close, it occurs to me that it’s a good time to remind you about a few important financial statements that can make a huge difference to your business when you understand them and keep them up to date. Your Profit & Loss, aka P&L, aka Income Statement is one of them. Your Balance Sheet is another. And the Cash Flow Statement is the third: wrapping up this powerful trio of financial tools.
With Q2 on the horizon, remember: if you haven’t yet set up or maintain current your financial statements, it’s not too late to get caught up. Because these 3 statements can be used to “read” the state of your business, and even its future.
“Oh, Anne. Do I really need all three? Seriously. That’s a lot of numbers.”
Yes. Yes you do. Because they’re all a bit different and they all have their role.
You know how your new iphone came with that “live photo” feature? Which captures a couple of seconds before and after each picture you snap?
Your Profit and Loss Statement is like the video file. It captures important information over a period of time, say in Q1, or in the past calendar year. Think of it like a movie – it has a definite start and a finish, detailing what you sold in your business during that time and how much it cost you.
Whereas your Balance Sheet is the still snapshot of a single point in time. Your Balance Sheet shows – at any given moment – what your business owns (Assets), what it owes (Liabilities), and how much is left over (Owner Equity).
If we were talking about a snapshot of your Home Ownership Picture, the Asset part of your home would be the price you paid for the property. The liability portion is the current balance owing on your mortgage. Owner Equity is the amount you’ve paid off, between your down payment and all principle payments you’ve made – your current equity – at the date you take the snapshot. The concept is the same for a business, with a few more sub-categories involved.
So now you may be thinking, “All that’s about as useful as the live photo feature on my iphone. I never asked for extra video of my dog sneezing then wiping his face on the ground. I just wanted that split second while he looked adorable!”
Yeah, but in this case, BOTH the snapshot and the view-over-time contain hugely useful information for you, the business owner.
Financial statements reveal important signs of the strength, sustainability and growth potential of your business. Your balance sheet will predict whether or not your bank is likely to give you a loan, because the Balance Sheet shows your company’s strength: do you own more than you owe? If so, does it look like you’ll be able to pay your bills in a timely way? Can your assets quickly become cash? Your Balance Sheet also shows where cash might be hiding: if it’s not in the bank, is it in a huge overdue Accounts Receivable balance? (Why are you letting your customers use your money? Go collect it!)
Your P&L will highlight your opportunities to generate profit by increasing revenue, reducing expenses, or both.
And Cash Flow is the bridge between your P&L and your Balance Sheet – the link between the movie and the snapshot. I’ll get into Cash Flow in my next post. I know, pathetic teaser.
You make vital decisions every day in your business – where to invest, how much to spend, when to raise prices, whether to borrow, what to do next…. Your financial information is a tool that can help you make informed, appropriate and quick decisions. Keeping an eye on these 3 statements helps you see what’s really going on and can save you from nasty surprises, sneaky profit leaks and money hiding.
If you suspect you could be making better financial decisions for your business and want to know where to look for more profit, book a call with me here. We’ll figure out where to look to make your business more profitable.
