Written by Alverta “Sandy” Steinwedel
Every business owner has the passion, ability and knowledge to run their business. This is not enough; the business owner needs to understand and monitor the business financial health with current and historical financial data.
The two key reports, the Profit/Loss Statement and Balance Sheet, provide the information to make informed financial decisions. Upon review of the two documents, the owner learns some of the same financial information is on both, but as business tools the documents provide different information.
Balance Sheet:
Included in the balance sheet are:
- Assets – Current and Long-term
- Liabilities – Current and Long-term
- Equity (Shareholder or Business Owner)
The balance sheet is based on the accounting equation of: Assets = Liabilities + Equity. In the simplest terms the balance sheet represents what the owner owns and what is owed. The goal for the business owner is to have more assets than liabilities, this indicates a positive net worth.
Balance Sheets as well as Profit/Loss Statements should be analyzed and reviewed at least once a month. Viewing a company’s financial health monthly allows for the business owner to address potential issues early so adjustments can be made.
Balance Sheet Are Used for:
- Financial institutions require a balance sheet statement for loan approval. The lender can determine if the owner can repay the loan in a timely manner.
- Making long-term decisions such as: expansion and
- Inventory concerns. If items are not selling inventory can become a serious liability,
Profit and Loss Statement
The Profit & Loss Statement (P & L Statement) is also known as the “statement of income” or “income statement.” The P & L Statement summarizes the revenues, costs and expenses in a specific period. This report shows if the revenue collected is significant enough to cover the costs: Cost of Goods Sold, Operating Expenses, and Overhead for any job.
As stated above, a monthly review of a P & L Statement is important. Close monitoring of this statement helps the owner determine if the revenue is strong and the expenses are within budget. Example: The company has a flat fee for a job which does not change for six months yet the cost of job (expenses/time) goes up by 2-3% in the same period. The owner will see a decrease in profit and immediately search for a resolution.
In addition, when reviewing the statements, it is important for the business owner to compare not only current data but historical data. Viewing historical data, the owner will see trends which could help with the company’s cashflow.
In conclusion, both statements are invaluable to the business owner no matter the size. Close monitoring of your business’s financial health helps generate profits, growth potential, and effective management.
