Understanding financial statements is a great skill to have as a business owner. The numbers can tell you a lot when they’re subject to expert analysis. But when you’re a busy entrepreneur, your plate already good and full. You don’t always have time to track performance, or for the kind of data analysis you need to track your company’s progress and success. Servicing existing clients and bringing in new ones is what you’re really good at. It’s what you need to be doing, every day. But you know the importance of data in determining your enterprise’s direction, the rate of growth and overall success. At Norton Financials in Hoboken, New Jersey, we specialize in personalized accounting solutions that provide a snapshot of your company’s strengths, weaknesses, and trajectory.
The Income statement (or profit & loss) and balance sheet are the most common financial statements among small business owners. Each should be prepared and reviewed on a monthly & yearly basis. These reports can be pulled (after reconciliation) from whichever accounting software your business uses (QuickBooks, Xero Accounting, etc.). Below is a breakdown of each.
Income Statement (Profit & Loss Statement)
The Income statement shows financial activity for a period of time. This financial statement summarizes business income (sales, revenue, etc.), expenses, and net Income (or loss) for the period of time measured. Business owners should be preparing PnL reports on a monthly basis, and comparing month over month changes. It is also helpful to compare the most recent month results, with the same month for the prior year. This help compare how business is progressing over time.
As mentioned above, the Income statement shows financial activity over a period of time (month, year, etc.). The balance sheet shows a snapshot of the business at a certain point in time. The balance sheet is used to show what a business holds (in assets) vs. what the business owes (liabilities). This gives business owners and others (banks, investors) a snapshot of the financial position of the business.
Analyzing Financial Statements
Once you are familiar with these financial statements, it’s useful to prepare and review on a monthly basis. When looking at the Income statement, business owners should be reviewing each section (Income, expenses, net Income) separately. When looking at revenue & expenses, you should be comparing to prior months data and interpreting changes in amounts. For example, analyzing expenses may show that advertising and promotional costs have increased 20% from the prior month. Business owners can now take this information to their marketing department to further understand the increase in costs. This type of analysis & investigation will help keep expenses lean within your business. The balance sheet helps consider the business’ assets and debts as a whole. The PnL isn’t meant to factor these into the equation. The balance sheet is useful to prepare and review on a monthly basis. This can help business owners evaluate cash balances, credit card debt, payables, receivable, business loans, etc.
How to Ensure Accuracy on Financial Statements
A business can hire a bookkeeper or accountant to prepare & analyze these financial statements on a continual basis. The bookkeeper should be populating data for the day to day financial activity of the business. This is done through an accounting software such as QuickBooks (desktop or online) or Xero Accounting. The books are reconciled after the month ends, and financial statements can be pulled. You may want to export these reports from your accounting software into microsoft excel to allow for greater ability to customize formatting and prior period comparisons.
Norton Financials is Hoboken, New Jersey’s Source for Bookkeeping and Accounting Solutions
While understanding how to interpret financial statements is important for business owners, it may make more sense for you to outsource the actual process of preparing these statements. Norton Financials, a small business bookkeeping & accounting firm, provides monthly packages to help you get this done.
Call Us for Personalized Solutions.
At Norton Financials, we know you’re too busy for the fine analysis data requires to be meaningful and useful to your business. Call to discover the difference professional bookkeeping solutions and data analysis can make to your enterprise and its growth.