Benefits of Financial Statements in Small Businesses
The number of issues demanding the attention of a small business owner can be overwhelming. Often this leaves them with no time to review their balance sheet, income statement, and cash flow statement.
Some simply underestimate the importance of financial statements and put them at the bottom of their priorities. Read on to find out the benefits of preparing financial statements.
It gives you a picture of the state of your business
Financial statements, particularly the balance sheet, provide you with the clearest picture of your business’s financial status and whether or not you are making the correct headway. Balance sheets are often made up of two components — assets and liabilities. Assets are broken further down into current assets and fixed assets, while liabilities are divided into current liabilities and long term liabilities. Finding the difference between your liabilities and assets helps you establish your net worth, and comparing it with past balance sheets helps you determine if you are making progress or not.
It helps in budget preparation
Your budget is just as important as your business plan. It gives you short term goals and ensures you don’t spend beyond your means. Proper financial reporting helps you understand your business’s financial status and come up with more realistic objectives.
It helps you assess the performance of specific investments
Every business looks to identify high-ROI investments and minimize ones with low returns, but you cannot achieve this if you don’t keep a comprehensive income statement. Income statements keep information about sales, cost of sold goods, gross profit, operating profit, operating expenses, and depreciation. They help review profits generated by specific investments and provide you with the data you need to streamline your sales activities.
It helps you make more accurate cash flow projections
Cash flow projections are crucial when planning a business expansion project or looking to make high-ticket purchases. With the help of a cash flow statement, you can identify imminent revenue pitfalls or windfalls and make more informed moves and investments.
Identification of market trends
One of the biggest secrets to success in business is identifying the peak seasons and low seasons and adjusting your operations based on them. If you have your financial records for the past four or five years, you can perceive those periods with much more ease. You can even take the time to identify trends for individual products or services, so you can make more specific adjustments. For example, if you deal with car products and realize an average surge in demand for tires right before winter and a fall in demand for windshield sun protectors, you can cut back on your expenditure on sun protectors and purchase more tires.
Preparing financial statements is necessary for the health and growth of your business. Even if your business is small and you can track most of your transactions without keeping records, there is a good chance you will regret not doing it in the future. Consider consulting a financial advisor if you don’t know where to start or just hire an accountant.