Your business financials are essential for lenders and investors who want to see hard figures before putting money into your business. Solid financials could help you get loans and attract investors.

Financial statements are your ‘go to’ documentation as they contain important information about the organisation’s operating results and financial position.

The relationship between certain items of financial data can be used to identify areas where your business excels and, more importantly, where there are opportunities for improvement. 

Understanding and analysing financial statements will help you make much better business decisions.

 

Interpreting financial statements

The key to being across accounts is knowing how to understand financial statements: how they are prepared, what they tell you, and what they don't.

Properly prepared financial statements can help you analyse your business cash flow, profitability, gross and net margins, debtor and creditor position, and the net asset position of your business, amongst other things. 

Once you do this, you'll see the total in your bank account is not necessarily the income you have earned. There is far more to profit than actual deposits in the bank.

To really comprehend where your business stands, it is critical to look at certain financial statements. Financial statements are generated by first organising, and then analysing, numbers from your accounting activities.

 

The essential business reports required to analyse your business' financial position include:

  • The balance sheet – this is a record of your business' assets, liabilities, and capital, at a specific point in time.

  • The profit and loss statement (or income statement) – this is the summary of your business' earnings, expenses, and net profit (or loss) over a specific amount of time.

  • The cash flow statement – this will show the actual inflows and outflows of cash coming into and out of your business.

There are other financial statements you may find helpful depending on your specific business, but the above three will give you sufficient detailed information with which to begin. 

When you look at these financial statements, a lot of the mystery surrounding the finances of your business will disappear. In black and white, you will be able to see every dollar that has come into your business and every dollar that has gone back out.