Even the most successful business owners could use some fresh perspective now and then. Take Ebenezer Scrooge. In Charles Dickens’ classic A Christmas Carol, Scrooge is visited at night by three spirits, each showing him something he hasn’t understood, takes for granted, or isn’t expecting. The next morning, he wakes up with a new outlook and purpose in life.
I’m sure you’re not as out-of-touch as Scrooge was, but are you seeing the past, present, and future of your business clearly? You don’t need to look for the answers from three spirits—these three financial reports will do the trick.
An income statement, also called a profit and loss (P&L) statement, shows the revenue and expenses you incurred in a given time period. It’s how lenders, investors, and customers assess your company’s history and documented financial health. And it’s an essential piece of your federal and state reporting obligations. Your net income not only determines your taxable income each year, but helps stakeholders and potential business affiliates determine if you have a dependable track record.
A balance sheet indicates the current net worth of your company. Unlike a P&L, which lists your income and expenses, the balance sheet is a two-sided chart with three components: assets on one side, and liabilities and equity on the other. One side communicates the value of what you own (your assets), while the other side shows how that value was funded, i.e. what you owe along with owners’ equity. If the report isn’t properly balanced—hence the name—it’s a clear indicator you need to take financial action, now.
Cash Flow Statements
A cash flow statement exposes how you spend and earn your income over a period of time. Technically, a cash flow statement is a report about the past, but it can be a powerful indicator of overall leadership and strategic decision-making. It shows how your business operates, how you generate cash, and how you handle financing inflows and outflows—all of which can reveal ongoing patterns and trends. For this reason, investors sometimes assess cash flow statements to determine a business’s ability to continue generating revenue and stay profitable. By the same token, issues with a cash flow statement often point to an uncertain financial future.
For more information about income statements, balance sheets, and cash flow statements, check out this visual guide from our friends at inDinero.
Are Your Reports Trustworthy Messengers?
Income statements, balance sheets, and cash flow statements are essential accounting tools and, when used in unison, can analyze your past performance, present position, and future outlook. These three reports reveal incontrovertible truths about where your business has been, where it is now, and where it’s likely headed. They provide insights into the underlying fundamentals, operational efficiency, and momentum of your business model, allowing company leadership—as well as investors, lenders, and customers—to collect and track real data about business performance.
However, financial reports are only as valuable as the information they contain. If your reports are incomplete, inaccurate, unreliable, or outdated, they can damage your operation and seriously mislead people within and outside your organization. From poor planning and budgeting to difficult investor relationship management, bad financial information can cause numerous problems for your business. Moreover, without accurate financial reports, you can’t reliably prepare and file your annual tax returns or meet other legal obligations.
If you’re unsure about your company’s P&Ls, balance sheets, income statements, or any other financial report, the advisors at tempCFO are here to help. We will not only build detailed reports and ensure their accuracy, but translate the data into actionable insights you can use to grow your business and interpret those insights with you. See how using an outsourced CFO can give you a better perspective—and a better night’s sleep.