Many small business owners take a basic approach to financial management. They have two main concerns: whether their bank account balance is positive; and if they’ll get their business income and expense information to the accountant in time for their annual tax return.
The problem with this approach is that by the time you discover there’s a problem with your company’s financial performance, it may be too late. Taking corrective measures early on will vastly improve your chances of success.
There are three types of financial statements you should be familiar with:
1. Income statement: this shows the income and expenses the company has incurred over a given period of time.
2. Balance sheet: this gives a snapshot of your company’s financial state at a given time – what you own (your assets) and what you owe (your liabilities).
3. Cash flow statement: this reports the cash generated and used during a specific period. This differs from the income statement because cash may not change hands when a sale or purchase occurs.
As a business owner, looking at your financial statements annually isn’t enough, especially if you don’t have the information until several months after the end of your financial year. You really need to look at your financial statements on a quarterly or even monthly basis. Keeping on top of your business finances is getting easier with the availability of software such as Sage 50 Accounting or QuickBooks. But if you use these tools, make sure that you understand how to enter in the information properly. If you don’t, the financial statements generated by the software won’t make any sense.
Many bookkeepers and accountants offer training on accounting software. To save a lot of headache for everyone down the road, get your bookkeeper to help with the set up.
It’s also important that you understand what your financial statements mean, so that you know how to use the information they provide. Women’s Enterprise Centre offers two learning guides to help with this: Financial Understanding and Financial Management.