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One of the most important indications of a business’s health is the state of its finances. Successful business owners regularly evaluate their business’s financial statements to understand the overall health of the business. Financial statements are key to business success because they are one of the most important tools used by management to make strategic business decisions that support long-term growth and profitability. A lack of understanding of a company’s financial position can lead to poor planning and decision-making for the business’s strategic objectives and long-term goals. There are several different types of financial statements and reporting that each provide a unique view into a business’s financial health. The financial statements outlined below can provide a business owner with the tools to truly understand his or her business.
One of the benefits of sound financial statements is that they can essentially provide a scorecard of your business. For example, a company’s balance sheet will show its financial health at a particular point in time by disclosing the company’s assets versus its liabilities. Conversely, a company’s income statement will provide information on revenues and expenses for a longer period of time, allowing the company to keep track of their progress and forecast future periods. The statement of retained earnings, on the other hand, can be a useful tool for investors to understand profits that are being held for future use and if, or when, any dividends have been paid to stockholders. Finally, a company’s statement of cash flows will provide information about how operations, investing, and financing activities are affecting the business. Understanding these statements and the data used to generate them can be a very valuable tool for management.
While the importance of proper financial reporting cannot be overstated, financial statements are only as reliable as the data they are based on. For this reason, it is important to have proper accounting procedures in places such as those for tracking inventory, reconciling bank accounts, and dealing with aged receivables. Having a robust set of procedures in place will enable management to more effectively evaluate the financial health of the business in a timely manner. As a business owner, one of your most valuable tools is the proper knowledge and data to make strategic business decisions. If you have any questions about proper financial reporting, or if you need help creating your business scorecard, please consult your P&N Tax Advisor.